# Daniel H. Golden, as Litigation Trustee of the QHC v. Community Health Systems, Inc.

> United States Bankruptcy Court, D. Delaware · March 16, 2023

URL: https://www.frixlaw.com/law-library/cases/10456162

## Case

- **Court:** United States Bankruptcy Court, D. Delaware
- **Decided:** March 16, 2023
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: Chapter 11
QUORUM HEALTH CORP., Case No. 20-10766 (BLS)
Reorganized Debtor

DANIEL H. GOLDEN, as Litigation
Trustee of the QHC LITIGATION Adv. Pro. No. 21-51190 (BLS)
TRUST and WILMINGTON SAVINGS
FUND SOCIETY, FSB, solely in its Re: Adv. D.I. 1, 43
capacity as Indenture Trustee
Plaintiffs,
¥v.
COMMUNITY HEALTH SYSTEMS,
INC.; CHS/COMMUNITY HEALTH
SYSTEMS, INC.; REVENUE CYCLE
SERVICE CENTER, LLC; CHSPSC,
LLC; PROFESSIONAL ACCOUNT
SERVICES, INC.; PHYSICIAN
PRACTICE SUPPORT, LLC;
ELIFIBILITY SCREENING SERVICES,
LLC; W. LARRY CASH; RACHEL
SEIFERT; ADAM FEINSTEIN; AND
CREDIT SUISSE SECURIITES (USA)
LLC,
Defendants.
OPINION!

1 This Court has jurisdiction to decide the Motion to Dismiss pursuant to 28 U.S.C. § 157 and
§ 1334(b). The Bankruptcy Court also has the power to enter an order on a motion to dismiss even if
the matter is non-core or the Court has no authority to enter a final order on the merits. Burtch v.
Owlstone, Inc. (In re Advance Nanotech, Inc.), 2014 WL 1320145, *2 (Bankr. D. Del. Apr. 2, 2014)
citing In re Trinsum Grp., Inc., 467 B.R. 734, 739 (Bankr. 8.D.N.Y. 2012) (After Stern v. Marshall,
the ability of bankruptcy judges to enter interlocutory orders in proceedings... has been reaffirmed .
Pursuant to Fed. R. Civ. P. 62 (made applcahble here through Fed. R. Bankr. P. 7052) the
Court does not make findings of fact for purposes of a decision on a Fed. R. Civ. P. 12(b) motion.

On April 7, 2020, Quorum Health Corporation and 134 related entities? filed chapter
11 bankruptcy petitions. On June 30, 2020, the Court entered its Findings of Fact,
Conclusions of Law and Order Approving the Debtors’ Disclosure Statement for, and
Confirming, the Debtors’ Joint Prepackaged Chapter 11 Plan of Reorganization (the
“Confirmation Order”). The confirmed Plan‘ established the QHC Litigation Trust (the
“Trust”) at the request of the holders of certain Senior Notes to investigate potential causes
of action and to prosecute or settle, on behalf of the Trust’s beneficiaries, all claims and
causes of action of the Debtors or their bankruptcy estates that were transferred to the
Trust.
On October 25, 2021, Daniel H. Golden, as Litigation Trustee of the QHC Litigation
Trust (the “Trustee”) and Wilmington Savings Fund Society, FSB “WSIS” or the
“Mmdenture Trustee”) filed a Complaint against Community Health Systems, Inc. and
related entities and officers of CHS (the “CHS Defendants”)6 and Credit Suisse Securities
(USA), LLC (“Credit Suisse”). The Complaint asserts numerous claims for intentional and
constructive fraudulent transfers, breach of contract for unpaid amounts due on the Senior
Notes, illegal dividend, aiding and abetting illegal dividend, and unjust enrichment.

2 By Order dated April 8, 2020 (Main Case Docket No. 58), the Court approved joint
administration of 135 chapter 11 debtors under the bankruptcy case of Quorum Health Corporation
(Case No, 20-10766). A complete list of the 135 jointly administered chapter 11 debtors (the
“Debtors”) can be found in Docket No. 58.
3 Main Case Docket No. 556.
4 The Revised Debtors’ Joint Prepackaged Chapter 11 Plan of Reorganization (the “Plan”) is
attached as Exhibit 1 to the Confirmation Order.
5 WSFS filed the Complaint solely in its capacity as the Indenture Trustee under that certain
indenture (the “Indenture”), dated as of April 22, 2016, for the unsecured 11.625% Senior Notes due
April 2023 (the “Senior Notes”). The Trustee and WSFS are referred to herein as “Plaintiffs.”
6 The CHS Defendants include Community Health Systems, Inc. (“CHS”); CHS/Community
Health Systems, Inc.(‘CHS-2”); Revenue Cycle Service Center, LLC; CHSPSC, LLC; Professional
Account Services, Inc.; Physician Practice Support, LLC; Eligibility Screening Services, LLC; W.
Larry Cash; Rachel Seifert; and Adam Feinstein.

The CHS Defendants filed a Motion to Dismiss? numerous counts in the Complaint.®
The Plaintiffs oppose the CHS Defendants’ Motion to Dismiss.? The Court has heard oral
argument on four pending motions, including the CHS Motion to Dismiss!” The matters
are ripe for determination.
For the reasons set forth in this Opinion, the Motion to Dismiss will be granted in
part and denied in part. Counts One and Two of the Complaint seek to avoid the Spin-Off
Dividend (defined below) as a constructive and intentional fraudulent transfer under
Bankruptcy Code §§ 544 and 550 and applicable state law. As discussed more fully below,
those Counts must be dismissed because the transfer is protected by safe harbor provisions
of Bankruptcy Code Section 546(e). For the reasons stated herein, the Motion to Dismiss
Counts Twelve, Thirteen, Fourteen and Fifteen will be denied.
FACTUAL ALLEGATIONS
The following is a summary of the Complaint’s extensive factual allegations.
The Plaintiffs allege that in 2015 CHS’s stock was in free-fall, due to
declining operating performance and more than $17 billion in debt, $1.2 billion of
which was coming due in 2016 and 2017 (Compl. □ 1, 32). Without access to
traditional sources of capital to refinance its maturing debt and facing rating
downgrades and the prospect: of its own bankruptcy (Compl. #{ 1, 2, 33, 96), the
7 Adv. Docket No. 48.
® The Memorandum of Law in Support of the CHS Defendants’ Motion to Dismiss addresses
arguments to dismiss Counts I, H, XII, XIII, XIV, and XV. (Adv. Docket No. 44). The CHS
Defendants’ motion to dismiss Counts ITI, IV, XI (in part) and other claims are not fleshed out in the
parties’ briefing and will not be considered.
9 ‘The Plaintiffs filed a brief in opposition to the Motions to Dismiss. (Adv. Docket No. 68).
The CHS Defendants filed a reply brief (Adv. Docket No. 84).
10 The four motions are: G) The CHS Motion to Dismiss (Adv. Docket No. 43); Gi} Credit
Suisse’s Motion to Dismiss for Failure to State a Claim (Adv. Docket No. 47); Gi) Quorum Health
Corporation’s Motion to Intervene (the “Motion to Intervene”) (Adv. Docket No. 54); and Gv)
Defendants’ CHS, W. Larry Cash and Rachel Seifert’s Motion to Stay Litigation Pending Arbitration
(the “Stay Motion’) (Adv. Docket No. 61). This opinion addresses the first item; the remaining
motions will be addressed in separate opinions,

Plaintiffs allege that CHS devised a scheme to raise $1.21 billion needed to pay
down its debt, while simultaneously divesting some of its worst-performing assets
(the “Spin-Off’). (Compl. 2, 36).
The Plaintiffs allege that CHS effectuated the scheme by creating Quorum
Health Corporation (““Quorum” or “QHC”) as a wholly owned subsidiary and by
contributing the following assets to Quorum: (i) 38 hospitals located primarily in
rural areas with populations of 50,000 or less (the “Quorum Hospitals”), and (ii) a
small consulting business called Quorum Health Resources (“QHR” and together
with the Quorum Hospitals, the “Quorum Assets”). (Compl. {2, 36). The Plaintiffs
claim that a Separation and Distribution Agreement (the “SDA”) between CHS and
Quorum purported to set forth the terms governing the legal and structural
separation of Quorum from CHS. (Compl. {| 82). The Plaintiffs further allege that
the SDA was drafted entirely by CHS and was heavily one-sided in CHS’s favor.
(Compl. 82).
The Plaintiffs allege that CHS then manipulated the financial projections of a
standalone Quorum so that Quorum could incur over $1.2 billion in debt (the “Spin-
Off Debt”). (Compl. {J 5-6, 54). In particular, the Plaintiffs allege that the Spin-off
Debt included the following:
(a} On April 22, 2016, CHS caused Quorum to borrow approximately $400
million through issuance of the unsecured Senior Notes (Compl. {[ 64);
(b) On April 29, 2016, CHS caused Quorum to enter into: @) approximately
$880 million of senior term loan credit facilities (the “Term Loan”); Gi) a
revolving credit. facility of up to an aggregate of approximately $100
million (the “RCF”); and (iii) an asset-based revolving credit facility

providing for up to an aggregate principal amount of approximately $125
million (the “ABL”) (Compl. { 64).
The same day the Spin-Off was consummated, the Plaintiffs allege that CHS
caused Quorum to transfer the Spin-Off Debt of $1.21 billion to CHS as a tax-free
dividend (the “Spin-Off Dividend”). (Compl. 3). The Plaintiffs assert that Quorum
paid the Spin-Off Dividend to CHS’s wholly owned indirect subsidiary BridgeCo,
which then merged with and into CHS-2, which is also wholly owned by CHS.
(Compl. § 85). The Plaintiffs assert that Quorum’s incurrence of the Spin-Off Debt
and payment of the Spin-Off Dividend left Quorum balance sheet insolvent, unable
to pay its debts as they came due, and inadequately capitalized. (Comp. { 85).
The Plaintiffs also allege that CHS engaged in the following fraudulent acts
to complete this scheme:
e CHS constituted the initial Quorum Board only with CHS senior
officials, who rubber-stamped the Spin-Off and Spin-Off Dividend
without holding a single in-person meeting, and who immediately
resigned from the Quorum Board once the Spin-Off Dividend was
approved and paid. (Compl.{{ 4, 39-48, 82-86).
e CHS created fraudulently inflated projections for Quorum that
significantly overstated projected revenues, margins, and the
number and proceeds of asset sales, while significantly
understating costs, at a time when Quorum’s actual operating
results showed that these projections defied reality. (Compl. 4] 5-6,
54).
e CHS systematically increased Quorum’s projected free cash flow
when the credit markets began to tighten to offset the increasing
cost of debt, ultimately inflating that number by approximately
$118 million. (Compl. J 5-6, 62).
e CHS retained Credit Suisse to serve as Quorum’s investment
banker and leveraged its longstanding relationship with Credit
Suisse so that Credit Suisse would turn a blind eye to the fact that

the debt it was helping CHS raise would render Quorum insolvent,
inadequately capitalized, and unable to pay its debts as they came
due. (Compl. 9] 7, 44).
e CHS appointed CHS executives to serve as the leaders of Quorum
post-Spin-Off and used its control over those executives prior to the
Spin-Off to prevent them from preparing to operate Quorum as a
standalone company or otherwise take steps that would reveal the
fraudulent nature of the transaction. (Compl. 8, 78-79).
e CHS curtailed investments in the Quorum Assets in the months
leading up to the Spin-Off, neglecting ordinary maintenance and
improvements to prioritize hospitals that would remain with CHS
post-Spin-Off (Compal. #4 9, 74-77).
e CHS burdened Quorum with onerous transition services
agreements that afforded CHS a steady stream of payments
regardless of the level of CHS’s performance under the agreements.
(Compl. 9, 68-78).
The Plaintiffs allege that Quorum fared poorly immediately after the Spin-
Off was completed in April 2016, as CHS had simply offloaded its own unsolvable
debt problem onto Quorum and left Quorum with less than $14 million cash on.
hand. (Compl. § 10). The Plaintiffs claim that Quorum violated its debt covenants
almost immediately after the Spin-Off was consummated and was forced to enter
into costly amendments to its term loan and dedicate virtually all of its available
cash flows to debt repayment. (Compl. 4] 10, 89-92).
Although Quorum was able to operate for several years through expensive
and onerous amendments to its credit agreements and an aggressive divestiture of
assets (ultimately selling 15 of 38 Quorum hospitals), the Plaintiffs allege that
Quorum eventually needed to file bankruptcy on April 7, 2020. (Compl. {J 93-95).
Quorum’s CFO testified in the bankruptcy case that the chapter 11 filing was

“driven by the financial obligations produced by the capital structure [Quorum] has
operated with since its inception, rather than the underlying business
performance.” (Compl. 11, 95).!!
STANDARD: MOTION TO DISMISS
When reviewing a motion to dismiss, the court will “accept all factual
allegations as true, construe the complaint in the light most favorable to the
plaintiff, and determine whether, under any reasonable reading of the complaint,
the plaintiff may be entitled to relief.”!2 In Twombly, the Supreme Court instructed
that a pleading must nudge claims “across the line from conceivable to plausible.”
“A claim has facial plausibility when the pleaded factual content allows the court to
draw the reasonable inference that the defendant is liable for the misconduct
alleged.”
The Third Circuit follows a three-step process to determine the sufficiency of

a complaint:
First, the court must “take note of the elements a plaintiff must plead
to state a claim.” Second, the court should identify allegations that,
“because they are no more than conclusions, are not entitled to the
assumption of truth.” Finally, “where there are well-pleaded factual
allegations, a court should assume their veracity and then determine
whether they plausibly give rise to an entitlement for relief.”

11 Compl. § 95 (citing Decl. of Alfred Lumsdaine, Executive Vice President and Chief
Financial Officer of Quorum Heath Corporation, in Support of Chapter 11 Petitions and First Day
Motions, 79 (Main Case Docket No. 24)).
12 Crystallex Int'l Corp. v. Petréleos De Venezuela, S.A., 879 F.3d 79, 83 n.6 (8d Cir. 2018).
13 Ashcroft v. Iqbal, 556 U.S. 662, 680 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S.
544, 570 (2007).
14 Iqbal, 556 US. at 678 (citing Twombly, 550 U.S. at 556).
18 Burtch v. Milberg Factors, Inc., 662 F.8d 212, 221 (8d Cir. 2011) (quoting Santiago v.
Warminster Twp., 629 F.3d 121, 130 (8d Cir. 2010).

The movant carries the burden of showing that the dismissal is appropriate.!®
DISCUSSION
1. The Safe Harbor of Bankruptcy Code § 546(e)
A, Does the Safe Harbor of Bankruptcy Code § 546(e) bar the
Trustee’s Fraudulent Transfer Claims brought on behalf of the
estate?
Counts One and Two of the Complaint against CHS and CHS-2 seek to avoid
and recover the Spin-Off Dividend as constructive and intentional fraudulent
transfers under 11 U.S.C. §§ 544 and 550 and applicable state fraudulent transfer
law.i7
The CHS Defendants argue that the Plaintiffs’ avoidance claims in Counts
One and Two are barred by Bankruptcy Code § 546(e) because the Spin-Off
Dividend was (i) a transfer, (ii) made by or to (or for the benefit of) a financial
participant, (iii) in connection with a securities contract.!8 The CHS Defendants
further argue that the Spin-Off Dividend was made in connection with the SDA,
which was a “securities contract,” as well as other related contracts for the purchase
and sale of securities. The CHS Defendants also argue that CHS-2 is a “financial
participant” as defined in Bankruptcy Code § 101(22A).

16 Paul v. Intel Corp. (In re Intel Corp. Microprocessor Antitrust Litig.), 496 F, Supp. 2d 404,
408 (D. Del. 2007).
17 Specifically, the Plaintiffs seek avoidance under Delaware, New York, and Tennessee state
law, as applicable. (Compl. {J 108, 107).
48 Section 546(e) provides in relevant part that:
Notwithstanding sections 544, 545, 547, 548(a)(1)(B) and 548(b) of this title,
the trustee may not avoid ...a transfer made by or to (or for the
benefit of) a ... financial participant ... in connection with a
securities contract, as defined in section 741(7) ... that is made before
the commencement of the case, except under section 548(a)(L)(A).
11 U.S.C. § 546(e) (emphasis added). □□□ Complaint does not assert any claims under § 548(a)(1)(A).

The Plaintiffs contend that whether the safe harbor of § 546(e) protects the
Spin-Off Dividend requires a fact-based inquiry and should be considered in a
motion to dismiss only if “the defense is clearly established on the face of the
complaint.”!9 The Plaintiffs assert that the CHS Defendants’ § 546(e) defense is
contradicted by the Complatnt’s allegations and is based, in part, upon agreements
that are not integral to the Complaint. The Plaintiffs further argue that analyzing
whether CHS-2 is a “financial participant” is a factual issue that also should not be
considered on a motion to dismiss.
The safe harbor of § 546(e) applies when two requirements are met:
“(1) there is a qualifying transaction (i.e., there is a ‘settlement payment’ or a
transfer payment ... made in connection with a securities contract), and (2) there is

a qualifying participant (i.e., the transfer was ‘made by or to (or for the benefit of) a

... financial institution, [or financial participant}’).”°
(i) Transfer
The first step in a § 546(e) analysis requires the Court to identify the relevant
transfer.21 The Complaint describes the transfer as follows: “QHC paid the Spin-Off
Dividend to CHS’s wholly owned indirect subsidiary BridgeCo, which then merged
with and into CHS-2, which is also wholly owned by CHS.”22 This is consistent with

19 Zazeali v. AFA Fin. Grp., LLC (in re DBSI, Inc.), 477 B.R. 504, 515 (Bankr. D. Del, 2012).
20 SunkEdison Litig. Trust v. Seller Note, LLC (in re Sunkdison, Inc.), 620 B.R. 505, 518
(Bankr. S.D.N.Y, 2020) (quoting In re Nine West LBO Sec. Litig., 482 F.Supp.3d 187, 197 (S.D.N.Y.
7020) 21 SunEdison, 620 B.R. at 513 (citing Merit Mgmt. Grp., LP v. FTI Consulting, Inc.,___ U.5.
188 S.Ct. 883, 892, 200 L.Ed.2d 183 (2018)).
22 Compl. § 85.

the transfer identified in the CHS Defendants’ Motion to Dismiss, so there is no
dispute as to the transfer at issue.
Gi) Securities Contract
The next question is whether the transfer was made in connection with a
“securities contract.” Section 546(e) refers to § 741(7), which broadly defines
“securities contract” to include “a contract for the purchase, sale or loan of a
security” as well as “any other agreement or transaction that is similar to” such
agreement.22 The term “security,” in turn, is also broadly defined in the Bankruptcy
Code to include a “note,” “stock,” “transferable share,” or “other claim or interest
commonly known as ‘security.””24
The SDA provided that “QHC shall distribute cash proceeds from the QHC
Financing Transaction ... in partial consideration for the ultimate transfer of QHC
Assets to QHC.”25 The term “QHC Assets” is defined in the SDA as including “all of
the issued and outstanding capital stock or other equity interests of the Transferred
Entities.”26 Thus, the language of the SDA clearly includes the sale of securities.
The Plaintiffs, however, argue that CHS drafted the SDA using self-serving
language that should not be solely relied upon in the safe harbor analysis. The
Plaintiffs claim that the extensive allegations in the Complaint demonstrate that
the Spin-off Dividend was a gratuitous dividend not paid in consideration for the
QHC Assets, which continued to be owned, indirectly, by CHS’s shareholders. The
23 11 U.S.C. § 74.1(7A)G) and (vii).
2411 U.S.C. § 101(49)(A}Q@), Gi), (viii) and (xiv).
25 SDA, § 2.07(b). A copy of the SDA, which is referred to in the Complaint, is attached to the
Declaration of Gary A. Orseck in Support of Memorandum in Support of the CHS Motion to Dismiss
(Adv. D.1 45-1).
26 SDA, Art. I, at p. 9.
10

Plaintiffs also rely upon language in the CHS Form 8-K dated May 2, 2016 to assert
that, rather than a purchase and sale agreement, the SDA was described as an
agreement “setting forth, among other things, agreements regarding the principal
actions needed to be taken in connection with [a] Spin-off’ and “also set[ting] forth
other agreements that govern certain aspects of [the] relationship following the
Spin-off.” The Plaintiffs argue that further discovery is needed to determine the
true nature of the SDA.
But there is no question that the SDA between CHS and Quorum exists and.
that the transaction in which Quorum transferred the Spin-Off Dividend in return
for certain assets, including stock and other equity interests of the Transferred
Entities, was clear on the face of the documents.27. The lack of details about the
transaction in the Form 8-K does not alter the framework in the document. The
SDA falls within the definition of a securities agreement found in Bankruptcy Code
§ 546(e) and § 741(7).
Moreover, the Plaintiffs’ reliance on certain caselaw also does not support
their argument. In Pitt Penn Holding Company, the court declined to dismiss a
complaint under § 546(e) because disputed issues of material fact remained over
whether stock transfers were made as charitable gifts and not pursuant toa

27 “Transferred Entities” is defined as “the entities set forth on Schedule 1.01(g)” attached to
the SDA. SDA, Art. I at 15, See also SDA, § 2.07.
11

securities contract.28 Here, the Plaintiffs dispute the CHS’s motive for entering into
the SDA, but not its actual terms.”°
Also, in Tops Holding IT,®° the court denied the defendants’ request to safe
harbor dividend transfers under § 546(e) when those defendants argued that the
dividends were part of an integrated transaction that started with issuance of
private notes (involving securities contracts) and ended with the payment of
dividends.®! In Tops, Judge Drain concluded that the complaint sought to avoid the
dividend payments, not the notes offerings, and found the “integrated transaction”
argument “difficult” to accept under the precedent in Merit Management.*? The
Tops decision does not support the Plaintiffs’ argument here because the allegedly
avoidable transfers are referenced directly in and occurred pursuant to the SDA.
Accordingly, this Court concludes that the Spin-Off Dividend was made
pursuant to a securities contract, i.e, the SDA, and is a qualifying transfer under
§ 546(e).

8 In re Pitt Penn Holding Co., Inc., 2011 WL 4352373, *13 (Bankr. D. Del. Sept. 16, 2011).
29 See also Miller v. Black Diamond Capital Mgmt, L.L.C. (In re Bayou Steel BD Holdings,
L.L.C.), 642 BR. 371, 389 (Bankr. D. Del. 2022) Gn denying a motion to dismiss claims based on
§ 546(e), the court decided that a transfer was not made in connection with a securities contract
when that contract did not reference the contemplated distribution and the complaint did not allege
that the contract's proceeds were used to pay the distribution).
8¢ Halperin v. Morgan Stanley Inv. Memt., Inc. (In re Tops Holding Hf Corp.), 646 B.R. 617
(Bankr. S.D.NLY. 2022)
31 Tops at 681.
32 Tops at 681-82 (citing Merit Mgmt. Grp., LP v. FTT Consulting, Inc., U.S. ___, 188 8.Ct.
883, 200 L.Ed.2d 183 (2018); Greektown Litig. Trust v. Papas (In re Greektown Hidgs., LEC), 621
BR. 797, 808 (Bankr. E.D. Mich. 2020) (deciding that, for purposes of section 546(e), Merit Mgmt.
precluded application of the step transaction doctrine (which provides that interrelated yet formally
distinct steps in an integrated transaction may not be considered independently of the overall
transaction) if defendants rely on a component part of the sequence instead of the overall transfer to
be avoided.)
12

Git) Financial Participant
The next inquiry to establish that § 546(e) safe harbor protection applies to
the Spin-Off Dividend is whether the transfer was made to a qualifying
participant.?> Here, the CHS Defendants assert that CHS-2 is a “financial
participant” because on at least one day during the 15-month period preceding the
filing of the bankruptcy petition (April 7, 2020), it was counterparty to one or more
securities contracts with a total gross dollar value of not less than $1 billion.34 In
support, the CHS Defendants refer to private offerings of senior secured notes
completed by CHS-2 on March 6, 2019 in the amount of $1.601 billion and on.
February 6, 2020 in the amount of $1.462 billion. They also claim that on
November 19, 2019, CHS-2 executed a tender offer in which it exchanged new notes
with an aggregate principal amount of approximately $2.4 billion for preexisting
notes of the same amount.°
The Plaintiffs argue that the Spin-Off Dividend was paid to BridgeCo, not
CHS-2, and BridgeCo is not a “financial participant” under the Bankruptcy Code.
But the CHS Defendants argue that BridgeCo undisputedly merged into CHS-2 in

33 'The qualifying participants listed in the statute include “a commodity broker, forward
contract merchant, stockbroker, financial institution, financial participant, or securities clearing
agency.”
34 “Financial participant” is defined in Bankruptcy Code § 101(22A) as including “an entity
that, at the time it enters into a securities contract, ... or at the time of the date of the filing of the
petition, has one or more agreements or transactions described in paragraph (1), (2), (3), (4), ©) or (6)
of section 561(a) with the debtor or any other entity (other than an affiliate) of a total gross dollar
value of not less than $1,000,000,000 in notional or actual principal amount outstanding (aggregated
across counterparties) at such time or on any day during the 15-month period preceding the date of
the filing of the petition ....”
35 The CHS Defendants attached copies of CHS’s SEC filings to provide evidence of the
offerings. See Decl. of Gary A. Orseck in Support Defendants’ Motion to Dismiss (Adv. Docket No.
45), ix. 138 (CHSI Form 10-K dated 2/20/2020) and Ex. 14 (CHSI From 10-K).
13

connection with the Spin-Off8¢ and, therefore, the transfer was made to, or for the
benefit of, CHS-2 (the surviving entity of the merger). The Plaintiffs disagree,
claiming that because the merger happened after the transfer, CHS-2 is a
subsequent transferee not covered by § 546(e).
In Merit, “the Supreme Court concluded that ‘the relevant transfer for

purposes of the § 546(e) safe-harbor inquiry is the overarching transfer that the
trustee seeks to avoid under one of the substantive avoidance provisions.”’’ Thus,
the Merit court determined that if a qualifying participant (such as a financial
institution) serves as a mere conduit or intermediary within a component of the
overarching transfer between non-qualifying participants, then § 546(e) will not
apply.38 The SunHdison court, reviewing a similar “subsequent transferee”
argument as the one at bar, decided:
While Merit defined the relevant transfer as the overarching transfer
that the trustee seeks to avoid, it does not follow that the trustee can
escape the reach of the safe harbor by seeking to avoid an
intermediate transfer between non-qualifying participants and sue
the qualifying participants of the true overarching transfer as
subsequent transferees.%®
As discussed above, the overarching transfer that the Plaintiffs seek to avoid
in Counts One and Two of the Complaint is the transfer from Quorum to CHS-2.
The Plaintiffs cannot escape application of § 546(e) by claiming that the transfer to

36 See Compl. Ff 85 and 98.
37 SunEdison, 620 B.R. at 518 (quoting Merit, 138 5.Ct. at 893).
38 Sunkdison, 620 B.R. at 513 (citing Merit, 138 S.Ct. at 892, 897).
39 SunEdison, 620 B.R. at 513-14 (citing Holliday v. K Road Power Mgmt., LLC (In re Boston
Generating LLC), 617 B.R. 442 (Bankr. 8.D.N-Y. 2020)).
14

BridgeCo (a non-qualifying participant) is avoidable and may be recovered from
CHS-2 (a qualifying participant) as a subsequent transferee.
Moreover, the CHS Defendants argue that it is inconsequential whether the
Spin-Off Dividend went. directly “to” CHS-2 because the statutory language of
§ 546(e) equally protects transfers made “for the benefit” of a financial participant.
The Complaint alleges that the Spin-Off Dividend was “undertaken for CHS’s and
CHS-2’s sole benefit.”4° The Court agrees that this statement, as well as the
inferences arising from other allegations in the Complaint, demonstrate that the
Spin-Off Dividend was “for the benefit” of CHS-2.
What remains, then, is to determine whether CHS-2 meets the definition of a
“financial participant.” The CHS Defendants have submitted two SEC filings to
support their contention that CHS-2 had sufficient transactions to meet the Code’s
definition of a financial participant.*! The Plaintiffs argue that the Court cannot
rely on these materials when considering a motion to dismiss because the SEC
filings are neither referenced in, relied upon, nor integral to the Complaint. The
Plaintiffs also assert that they must be afforded an opportunity for discovery on this
factual issue.
Federal Rule of Evidence 201 permits a court to take judicial notice of facts
that are “capable of accurate and ready determination by resort to sources whose

40 Compl. | 110.
41 See Adv. Docket No. 45, Ex. 13 (2/20/2020 CHS Form 10-K) at 77-78; Ex, 14 (2/17/2020
CHS Form 10-) at 109.
15

accuracy cannot reasonably be questioned.”42 Because SEC filings “are required by
law to be filed with the SEC, no serious questions as to their authenticity can
exist,”43 Generally, SEC filings are “relevant not to prove the truth of their contents
but only to determine what the documents stated.”44 The Third Circuit, however,
has taken judicial notice of facts in an SEC filing (not just the existence of the
document) when considering a motion to dismiss.‘ In this case, the Court finds it
appropriate to take judicial notice of the information in the CHS SEC filings for

purposes of determining whether CHS-2 meets the Code’s definition of a “financial
participant.” Those filings demonstrate that CHS-2 completed a private offering of
senior secured notes in the amount of $1.462 billion on February 6, 2020 Gust 2
months prior to the petition date).*
Based on the foregoing, the Court concludes that CHS-2 is a financial
participant and, therefore, the § 546(e) safe harbor protects the Spin-Off Dividend
transfers from avoidance.

42 Bed, R. Evid. 201(b)(2). See also Oran v. Stafford, 226 F.8d 275, 289 (3d Cir. 2000) CA
number of our sister circuits have held that thig rule permits a court, in deciding a motion for
judgment on the pleadings, to take judicial notice of properly-authenticated public disclosure
documents filed with the SEC.” (citations omitted)).
43 Oran, 226 F.3d at 289 (quoting Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir.
1991)).
44 Ted.
45 FTC uv. Shire VirePharma,Inc., 917 F.3d 147, 151 n. 5 (8d Cir. 2019) (The court accepted
statements in an SEC filing about the timeline in which the defendant developed, manufactured,
and marketed certain drugs.)
46 Adv. Docket No, 45, Ex. 14 (2/17/2020 CHS Form 10-#) at 109.
16

B. Does § 546(e) bar state law fraudulent transfer claims brought on
behalf of the Senior Noteholders?
The Plaintiffs argue that the Complaint also asserts claims on behalf of
approximately 95% of the Senior Noteholders.47 Even if § 546(e) precludes the
Trustee from pursing the fraudulent transfer claims in Counts One and Two on
behalf of the Quorum estate, the Plaintiffs contend that the § 546(e) safe harbor
does not prevent the Trustee from pursuing state law fraudulent transfer claims as
the assignee of the Senior Noteholders. The Plaintiffs rely on the plain language of
§ 546(e), which provides in pertinent part that:

47 The CHS Defendants argue that this Court lacks subject matter jurisdiction over the
claims asserted by the Senior Noteholders in this adversary proceeding, The Plaintiffs argue that
the Court has “related to” jurisdiction over the claims pursuant to §1334(b) because these claims
have a close nexus to the confirmed bankruptcy plan. “Matters that affect the mterpretation,
implementation, consummation, execution, or administration of the confirmed plan will typically
have the requisite close nexus” for related to jurisdiction. Binder v. Price Waterhouse & Co. (In re
Resorts Int'l, Inc.), 372 F.3d 154, 167 (8d Cir. 2004). The Plaintiffs point out that the Resorts court
determined that the bankruptcy court lacked “related to” jurisdiction over a litigation trust’s claim
against its accounting firm, brought almost seven years after plan confirmation, based on conduct
that occurred post-confirmation. In contrast, the Plaintiffs assert that creation of a QHC Litigation
Trust and granting the Litigation Trustee authority to investigate and pursue claims on behalf of the
estate and Senior Noteholders regarding the Defendants’ prepetition conduct was an important
component of the Plan. The Plan defines the “QHC Litigation Trust Assets” as including
“Contributed Claims,” which is in turn defined as prepetition causes of action relating to the Senior
Notes that are assigned to the Trust. See Plan, Art. IV.C.3 and Art. I. 30, 31, 123 and 124. The CHS
Defendants challenge this Court’s jurisdiction only with respect to the assigned Senior Noteholders’
claims, and not to the transferred estate causes of action, which arise out of the same facts and
- gircumstances. The Court concludes that there is a sufficient close nexus between the Senior
Noteholders’ claims and the implementation and execution of the Plan to satisfy “related to”
jurisdiction.
The CHS Defendants also assert that the Plaintiffs cannot assert claims on behalf of the
Senior Noteholders until the Litigation Trustee abandons his authority to assert those claims under
the aegis of the estate. The CHS Defendants rely on Wilton Armetale, Inc. v. North Mull Capital,
LLC, 968 F.3d 273 (3d Cir. 2020), a chapter 7 case, in which the court concluded that the trustee
must overtly abandon an estate cause of action during the bankruptcy case before the right to pursue
that action would revert to a creditor. Jd. at 284. Abandonment is not necessary in this case,
however, because (unlike in Wilton), the confirmed Plan overtly transferred the right to pursue both
estate and Senior Noteholders’ “Contributed Claims” to the Litigation Trust. See Plan, Art. IV.C.3
and Ast. I. 30, 31, 123 and 124.
17

Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this
title, the trustee may not avoid atransfer ... 4

The Plaintiffs argue that this language restricts only the powers of the “trustee,”
which the Code defines as the “representative of the estate.”49 The Plaintiffs also
note that § 546(e)’s prefatory clause references sections 544, 545, 547, and 548,
which are all avoidance claims under federal law that only a trustee, not the
estate’s creditors, can pursue. The Plaintiffs argue this demonstrates congressional
intent to apply § 546(e)’s restrictions only to the trustec’s federal avoidance powers
and they claim the safe harbor does not bar individual creditors’ state law
avoidance actions.
The CHS Defendants argue in response that the bar in § 546(e) preempts the
Plaintiffs from pursuing § 544 avoidance claims as the assignee and representative
of the Senior Noteholders. They rely upon the Second Circuit's decision in Tribune
Fraudulent Conveyance Litigation, which determined that allowing creditors to
bring claims that the trustee cannot gives rise to a conflict with the purpose of
§ 546(e), noting “the idea of preventing a trustee from unwinding specified
transactions while allowing creditors to do so, but only later, is a policy in a fruitless
search of a logical rationale.”5°
If § 546(e) bars estate avoidance actions, does § 546(e) also preempt
individual creditors from asserting state law fraudulent transfer claims? Under the
Constitution’s Supremacy Clause (Article VI, Clause 2), federal law prevails when it

48 11 U.S.C. § 546(e) (emphasis added).
49 11 U.S.C. §323(a).
50 In re Tribune Co. Fraudulent Conveyance Litig., 946 F.3d 66, 91 (2d Cir. 2019).
18

conflicts with state laws.5! “Under the implied preemption doctrine, state laws are
‘pre-empted to the extent of any conflict with a federal statute. Such a conflict

occurs ... when [] state law stands as an obstacle to the accomplishment and
execution of the full purposes and objectives of Congress.” ®?
The Tribune court recognized that:
Congress’s power to enact bankruptcy laws was made explicit in the
Constitution as originally enacted, Art. 1, § 8, cl. 4, and detailed,
preemptive federal regulation of creditors’ rights has, therefore,
existed for over two centuries. ... Once a party enters bankruptcy, the
Bankruptcy Code constitutes a wholesale preemption of state laws
regarding creditors’ rights.54
Thus, the Tribune court decided that any state law avoidance claims held by the
Tribune creditors “were preempted when the Chapter 11 proceedings commenced
and were not dismissed,” and those claims were vested in the trustee under § 544(b)
upon filing.54
The Tribune creditors, however, argued if a trustee failed to pursue the state
law avoidance claims in the bankruptcy case, those claims then reverted to the
creditors.65 The Tribune court determined that the effect of § 546(e) on the
creditors’ right (if any) to bring the state law avoidance claims was “ambiguous,”*6

51 Tribune, 946 F.3d at 81 (citing Arizona v. United States, 567 U.S. 387, 132 8.Ct. 2492,
2500, 183 L.Ed.2d 351 (2012).
8 Tribune, 946 F.3d at 81.
53 Td. at 82 (citing Charles Jordan Tabb, The History of the Bankruptcy Laws in the Untied
States, 3 Am. Bankr. Inst. L. Rev. 5, 7 (4995)).
54 Id, at 83.
55 Id, at 84-85. The Tribune court determined this theory had no basis in the plain language
of the Code and resulted in too many “ambiguities, anomalies, or conflicts with the purposes of the
Code.” Id. at 85-90. The Tribune court wrote that it need not decide the reversion issue to address
the preemption issues surrounding § 546(e). fd. at 90.
58 Td, at 90.
19

and, therefore, the court considered the preemption issue by looking at § 546(e)’s
language,®” legislative history,5® and purpose.5?

The Tribune court concluded that “[e]very congressional purpose reflected in
Section 546(e), however narrow or broad, is in conflict with [the creditors’] legal
theory.”®° Therefore, the Tribune court held that the creditors’ ability to assert
state law avoidance claims was preempted by § 546(e).
The Plaintiffs, however, argue that courts in this district have rejected the
reasoning of Tribune. In Physiotherapy,®! Judge Gross noted that state law
traditionally occupied the field of fraudulent transfer law and, therefore, the court

67 The Tribune court disagreed that the § 546(e)s use of the word “trustee” prevents
preemption of individual creditors’ rights, deciding that the word must be considered within the
context of the entire provision. Id. at 91 (“A search for legislative purpose is heavily informed by
language, and analyzing all the language of a provision and its relationship to the Code as a whole is
preferable to using literalness here and perceived legislative purpose (without regard to language) [ J
as needed to reach particular results.”).
58 ‘The Tribune court also noted that the legislative history of § 546(e) “reflects a concern over
the use of avoidance powers not only after the bankruptcy of a commodities or securities firm, but
also after a “customer” or “other participant” in the securities markets enters bankruptcy. ... Such
actions were perceived as creating a danger of “a ripple effect,” a chain of bankruptcies among
brokers disrupting the securities market, generally.” Id. at 92 (quoting H.R, Rep. No. 97-420 (1982)).
39 As for legislative purpose, the Tribune court noted that:
Section 546(e) was intended to protect from avoidance proceedings payments by
and to commodities and securities firms in the settlement of securities
transactions or the execution of securities contracts. ... Unwinding settled
securities transactions by claims such as [the Tribune creditors’] would seriously
undermine -- a substantial understatement -- markets in which certainty, speed,
finality, and stability are necessary to attract capital.
Allowing creditors to bring claims barred by Section 546(e) to the trustee ef al.
only after the trustee et al. fails to exercise powers it does not have would
increase the disruptive effect of an unwinding by lengthening the period of
uncertainty for covered entities and investors.
id, at 90-91.
60 Tribune, 946 F.3d at 90.
61 PAH Litig. Trust v. Water Street Healthcare Pariners L.P. (In re Physiotherapy Holdings,
Inc.), Adv. Pro. No. 15-61238 (KG), 2016 WL 3611831 (Bankr. D. Del. June 20, 2016). Physiotherapy
Holdings was decided between the Second Circuit’s first opinion on the preemption issue in Tribune
(in re Tribune Co. Fraudulent Conveyance Litig. (the “2016 Tribune Opinion”), 818 F.3d 98 (2d Cir.
2016)) and the Second Circuit’s 2019 Tribune opinion (which vacated and superseded the 2016
Tribune Opinion), issued after the Supreme Court's decision in Merit Mgmt. Grp., LP uv. FTI
Consulting, Inc., 188 8.Ct. 883 (2618).
20

applied a presumption against preemption. The Physiotherapy court determined
that Congress’ stated purpose of § 546(e) was reducing systemic risk to financial
markets, and the court found that the particular facts before it (involving a sale in
which two controlling shareholders owned more than 90% of the stock) would not
implicate those broader market concerns.*? The Physiotherapy court also concluded
that preemption was not appropriate based on the plain language of § 546(e), which
limited only the trustee’s avoidance powers.®4
Therefore, the Physiotherapy court concluded that the safe harbor does not
bar a litigation trust from asserting state law fraudulent transfer claims as a
creditor-assignee when: (1) the transaction sought to be avoided poses no threat of
“ripple effects” in the relevant securities markets; (2) the transferees received

62 Physiotherapy, 2016 WL 3611831 at *7. The Physiotherapy court looked to the district
court’s opinions in the Tribune Fraudulent Conveyance Litig., 499 B.R. 310 (8.D.N.Y. 2013) which
rejected express and field preemption arguments (499 B.R. at 315-16), and Weisfelner v. Fund I dn
re Lyondell Chem. Co.), 503 B.R. 348 (Bankr. S.D.N.Y. 2014), abrogated by Tribune Co. Fraudulent
Conveyance Litig., 818 F.3d 98 (2d Cir. 2016), writing:
Beginning with the presumption that “the historic police powers of the States
were not to be superseded by the Federal Act unless that was the clear and
manifest purpose of Congress,” the court concluded that (1) there was no express
preemption as Congress failed to explicitly state its intention to displace state
fraudulent transfer law, (2) there was no field preemption as federal and state
fraudulent transfer statutes have coexisted for many years, and Congress never
demonstrated any intent to “occupy the field” of fraudulent transfer law, and (3)
there was no conflict preemption under both the impossibility branch and the
obstacle branch.
Physiotherapy, 2016 WL 3611831 at *6 (quoting Lyondell, 503 B.R. at 359-361 (citations
omitted)).
83 Td, at *9.
64 Jd. The Physiotherapy court noted that other Bankruptcy Code sections explicitly state
when a section applies to other entities (e.g., “party in interest”) or expressly preempt state law by
incorporating phrases such as “notwithstanding any applicable law.” Id. (citing, e.g., 11 U.S.C.
§ 1109(b) and § 541(¢)(1)).
Al

payment for non-public securities, and (3) the transferees were corporate insiders
that allegedly acted in bad faith.®
The presumption against preemption relied on in Physiotherapy weighs most
heavily when a particular regulatory area is “traditionally the domain of state
law,”5¢ but as Tribune discussed above, it has long been recognized that the
Bankruptcy Code preempts a host of state laws regarding creditors rights. '

Moreover, “the policies reflected in Section 546(e) relate to securities markets,
which are subject to extensive federal regulation.”67 The language of §546(e) is
broad and does not support line drawing for each case when considering whether
preemption applies. The Tribune court recognized that “Section 546(e) is simply a

case of Congress perceiving a need to address a particular problem within an
important process or market and using statutory language broader than necessary
to resolve the immediate problem.”
This Court finds the reasoning of Tribune to be persuasive here. Accordingly,
the safe harbor of § 546(e) preempts the Plaintiffs’ ability to pursue avoidance
claims under state law fraudulent transfer law as assignees of the Senior
Noteholders. The Motion te Dismiss is granted as to Counts One and Two.

65 fd. at *10. The district court denied the Physiotherapy defendants’ subsequent motion to
appeal the bankruptcy court’s interlocutory order deciding, in relevant part, that there was no
substantial ground for difference of opinion “as the bankruptcy court's preemption analysis followed
well-established Third Circuit and Supreme Court law.” PAH Litig. Trust v. Water Street Healthcare
Partners L.P. (In re Physiotherapy Holdings, Inc.), Misc. No. 16-201-LPS, 2017 WL 6524524, “9 (D.
Del, Dee. 21, 2017}.
8 Tribune, 946 F.3d at 82 (quoting Hillman v. Maretia, 569 5S. 483, 133 8.Ct. 1943, 1950, 186
L.Ed.2d 43 (2018)).
&? Tribune, 946 F.3d at 83. ,
8 Tribune, 946 F.3d at 92.
22

The Court notes that it is constrained by the broad language of Bankruptcy
Code § 546(e) to dismiss these claims despite the fact that the Plaintiffs here have
plausibly alleged that the Defendants constructed a scheme for the purpose of
siphoning funds from the Debtor for the Defendants’ benefit. In his last opinion
before retiring from the bench, Judge Robert D. Drain discussed his concerns
regarding the reach of § 546(e), writing “[gliven the importance of fraudulent
transfer law in bankruptcy cases, Congress should act to restrict to public
transactions its current overly broad free pass in section 546(e) that has informed
the playbook of private loan and equity participants to loot privately held companies
to the detriment of theix non-insider creditors with effective impunity.” ® The
undersigned agrees with Judge Drain’s concerns and sentiments.
C. Does the safe harbor bar state law claims for illegal dividend and
unjust enrichment?
The CHS Defendants also assert that the Court must dismiss certain state
law claims that attack transfers otherwise protected by § 546(e). In particular here,
the CHS Defendants argue for dismissal of the claims for recovery under theories of
illegal dividend, aiding and abetting illegal dividend, and unjust enrichment
(Counts Thirteen, Fourteen and Fifteen). The Defendants contend that allowing a
plaintiff to assert state law claims to recover the same payments which were held to

69 Halperin v. Morgan Stanley Inv. Mgmt., Inc. (In re Tops Holding I Corp.), 646 B.R. 617,
688 (Bankr. §.D.N.Y. 2022) (emphasis in original).
23

be unavoidable under § 546(e) “would render the § 546(e) exemption meaningless
and would wholly frustrate the purpose behind that section.”70
In response, the Plaintiffs argue that the illegal dividend and unjust
enrichment claims do not seek to “avoid” transfers but seek to hold the CHS
Defendants liable for their intentional wrongful and fraudulent acts of causing
Quorum to pay the Spin-Off Dividend notwithstanding that they knew, or should
have known, that doing so would render Quorum insolvent, inadequately
capitalized, and unable to pay its debts as they came due. The Plaintiffs rely on
Lehman Bros., in which the court wrote:
The safe harbors are not all encompassing and do not offer “fail safe”
protection against every cognizable claim made in relation to
transactions that may fit within the statutory framework. ... The plain
language of section 546(e), read literally, provides limited immunity
but does not bar Plaintiffs from maintaining all common law claims,
intentional fraud claims and any other claims not expressly embraced
by section 546(e).7!
On this issue, the Court agrees with the holding in Lehman. The safe harbor
of § 546(e) is broad but it does not have unlimited boundaries. The CHS
Defendants’ motion to dismiss Counts Thirteen, Fourteen and Fifteen as barred by
the safe harbor of § 546(e) is denied.

70 Contemporary Ind. Corp. v. Frost, 564 F.3d 981, 988 (8 Cir. 2009) abrogated in part on
other grounds by Merit Management Grp., LP v. FTI Consulting, Inc., 138 S.Ct, 883 (2018). See also
Comm. of Unsecured Creditors v. Fleet Retail Fin. Grp. (In re Hechinger Inv. Co. of Delaware),
274 B.R. 71, 96 (D. Del. 2002) (Claims that Congress deemed unavoidable under sections 544(b) and
546(e) of the Bankruptcy Code can not be avoided by simply re-labeling avoidance claims as unjust
enrichment claims; if they could the exemption set forth in section 546(e) could be rendered
useless.”).
71 Lehman Bros. Holdings Inc. v. JPMorgan Chase Bank (In re Lehman Bros. Holdings Inc.),
469 □□□ 415, 450 (Bankr. 8.D.N.Y. 2012).
24

2. State law claims for illegal dividend and unjust enrichment
A. Are the Plaintiffs’ state law claims barred by claim preclusion or issue
preclusion?
In 2017, affiliates of CHS72 commenced an arbitration against Quorum (the
“Arbitration’), claiming Quorum breached certain transition service agreements
(“TSAs”) that were entered into as part of the Spin-Off. Quorum brought
counterclaims asserting, among other things, that CHS breached the TSAs by
improperly terminating them and that the TSAs were unconscionable. Quorum also
asserted a counterclaim for tortious interference with prospective economic
advantage, arguing that CHS engaged in a series of intentional acts, both before
and after the Spin-Off, that made it impossible for Quorum to capitalize on business
opportunities.”
After two weeks of evidentiary hearings and post-hearing briefing, on
January 3, 2019, the arbitrators issued an award denying Quorum’s claims
regarding the TSAs and for tortious interference.”
The CHS Defendants argue that many of the alleged facts and circumstances
underlying the Plaintiffs’ claims for unjust enrichment and illegal dividend in this
adversary proceeding are identical to facts alleged in Quorum’s Arbitration claims
and could have been raised in the arbitration. Therefore, the CHS Defendants argue
that Quorum already litigated - - and lost - - the same issues and, therefore, claim
and issue preclusion bar the Plaintiffs’ state law claims.
Revenue Cycle Service Center and CHSPSC, LLC.
73 See CHS Defendants’ Decl. in support of the Motion to Dismiss (Adv. Docket No. 45), Ex.
10, 32.
14 Fd, Ex. 9.
25

The Plaintiffs argue that claim and issue preclusion do not apply here
because there is no privity between Quorum and the Plaintiffs. The Plaintiffs also
contend that the Arbitration claims are not identical to the claims in this adversary
proceeding.
Claim preclusion (or res judicata) bars re-litigation of a claim if “there has
been (1) a final judgment on the merits in a prior suit involving (2) the same claim
and (3) the same parties or their privies.””> Claim preclusion “gives dispositive
effect to a prior judgment if a particular issue, although not litigated, could have
been raised in the earlier proceeding.””6
Issue preclusion (also referred to as collateral estoppel) bars parties from re-
litigating matters that they had a full and fair opportunity to litigate.” The Third
Circuit analyzes four requirements for applying issue preclusion: “(1) the identical
issue was previously adjudicated; (2) the issue was actually litigated; (3) the
previous determination was necessary to the decision; and (4) the party being
precluded from relitigating the issue was fully represented in the prior action.”’®
The Third Circuit also considers whether the party being precluded had a full and
fair opportunity to litigate the issue in question in the prior action.”
For either claim or issue preclusion to apply here, there must be privity
between pre-bankruptcy Quorum and the Plaintiffs. “In its broadest sense, privity is

78 In. re Montgomery Ward, LLC, 634 F.3d 732, (8d Cir. 2011} (quoting E.#.0.C. v. U.S. Steel
Corp., 921 F.2d 489, 493 (8d Cir. 1990).
% CoreStates Bank, N.A. v. Huls America, Inc., 176 F.3d 187, 194 @d Cir. 1999).
77 Sprint Comme’n Co. LP. v. Charter Comme, Inc,, 2021 WL 982726, *2 (. Del. Mar. 16,
2021)(citing Montana v. United States, 440 U.S. 147, 153 (1979)).
78 Id. (quoting Jean Alexander Cosmetics, Ine. v. L’Oreal USA, Inc., 458 F.3d 244, 249 (8d Cir.
2006)).
18 Td.
26

defined as mutual or successive relationships to the same right of property, or such

an identification of interest of one person with another as to represent the same
legal right.”8° The Third Circuit, following the Supreme Court, recognizes six
categories when nonparty preclusion may be appropriate:
(1) the nonparty agrees to be bound by the determination of issues in an
action between others;
(2) a substantive legal relationship —i.e., traditional privity ~ exists that
binds the nenparty;
(3) the nonparty was adequately represented by someone with the same
interests who was a party;
(4) the nonparty assumes control over the litigation in which the judgment
is rendered;
(5) the nonparty attempts to bring suit as the designated representative of
someone who was a party in the prior litigation; and
(6) the nonparty falls under a special statutory scheme that expressly
forecloses successive litigation by nonlitigants.®!
Here, neither the Litigation Trustee nor the Senior Noteholders agreed to be
bound by, or in any way had control over, the pre-bankruptcy arbitration. The
question focuses on whether the relationship between the parties would give rise to
privity under elements (2), (8), (5) or (6) above.
Claim preclusion may apply to a successor-in-interest, despite the general
rule against nonparty preclusion.®? However, the Third Circuit has recognized that

a trustee in bankruptcy is not simply the successor-in-interest to the debtor because

8 Trustees of General Assembly of Lord Jesus Christ of Apostolic Faith, Inc. v. Patterson, 527
F.Supp.3d 722, 762 (E.D. Pa. 2021) (quoting Greenway Ctr. Inc, v. Essex Ins, Co., 475 F.3d 139, 149
(3d Cir. 2007)).
8£ Patterson, 527 F. Supp.3d at 762-63 (quoting Taylor v. Sturgell, 553 U.S. 880, 893-94, 128
§.Ct. 2161, 171 L.Ed.2d 155 (2008)).
82 Montgomery Ward, 634 F.3d at 787 (citing Taylor v. Sturgell, 553 U.S. 880, 892, 128 S.Ct.
2161, 171 L.Ed.2d 155 (2008).
27

the trustee also represents the general creditors’ interests.83 Thus “the legal
relationship between the trustee and the pre-bankruptcy debtor is incomplete,
particularly when the interests of the creditors diverge from those of the debtor.”®4
Here, there is no indication that interests of pre-bankruptcy Quorum and the
Plaintiffs are so close that the Court can determine privity on a motion to dismiss.®®
The Court will deny the CHS Defendants’ motion to dismiss state law claims based

on the pre-bankruptcy arbitration proceeding.
B, Should the illegal dividend claim be dismissed under state law?
The CHS Defendants also argue that the illegal dividend claim must be
dismissed because the transfer that the Plaintiffs labeled the “Spin-Off Dividend”

was not a dividend at all but, instead, was “one side of a bilateral exchange”
between CHS and Quorum. Without an allegation of a formal declaration of a .
dividend by Quorum’s board of directors, the CHS Defendants assert that there is

no basis under Delaware law for an illegal dividend claim.
The Plaintiffs respond that the Complaint contains numerous allegations
that the SDA’s language does not accurately represent the true nature of the Spin-
Off Dividend and that the Complaint alleges that CHS and Quorum’s internal
documents refer to the transfer as a “dividend” or “distribution.” The Plaintiffs rely
on the case MC Asset Recovery in which the plaintiff argued that transfers were, in

83 Monigomery Ward, 634 F.3d at 738. See also Maxus Liquidating Trust v. YPF S.A. (in re
Maxus Energy Corp.), 2019 WL 647027, *5 (Bankr. D. Del. Feb. 15, 2019) (“[T]he Trust can not be
considered ‘close enough’ to the prepetition entity, Maxus, that it can be precluded based on claims
that Maxus did not assert in the [earlier litigation]”).
a “Moreover, at this stage of the proceedings, there is insufficient basis for determining
whether the causes of action could be considered identical for the Arbitration Award to have a
preclusive effect.
28

substance, dividends because there was no real consideration to support the
transfers.86 The MC Asset Recovery court denied the defendant’s request for

summary judgment due to factual disputes and noted “[iJn determining whether a
particular transaction constitutes a ‘dividend’ to shareholders, Delaware courts
have placed an emphasis on substance over form, and focused on the ‘economic
reality of the transaction.””87

Similarly, the Complaint here alleges a plausible claim for illegal dividend
and disputes over factual issues will not be resolved on a motion to dismiss. The
Motion to Dismiss the illegal dividend claims will be denied.
C. Is the unjust enrichment claim time-barred?
The CHS Defendants argue that the unjust enrichment claim is time-barred
and must be dismissed because the transfer occurred on April 29, 2016 - - nearly
four years before the petition date - - and the Defendants assert that the transfer is
beyond Delaware’s three-year statute of limitations.®®
The Plaintiffs contend that the Complaint alleges that CHS participated in a
fraud against Quorum’s creditors and took steps to conceal the fraudulent nature of
the projections and Quorum’s financial condition. For this reason, the Plaintiffs
assert that the statute of limitations was tolled because the fraudulent activity
prevented the injury from being discovered.
86 MC Asset Recovery, LLC v. Southern Co., 2009 WL 10666059, *12 (N_D. Ga. Feb. 5, 2009)
(applying Delaware law).
87 Id. at 18 {citing Off! Comm. of Unsecured Creditors of Buckhead Am. Corp. v. Reliance
Capital Group, Inc. (In re Buckhead Am. Corp.), 178 B.R. 956, 969-70 (D. Del. 1994) (abrogated, in
part, on other grounds, as recognized in Quadrant Structured Products Co., Lid. v. Vertin, 115 □□□□□
535, 545-47 (Del. Ch. 2015)).
8Vichi v. Koninklijke Philips Electronics N.V., 2009 WL 4845724, 15 (Del. Ch. Dec. 1, 2009)
(citing 10 Del. C, § 8106(a)).
29

“TA] statute of limitations may be tolled where a defendant fraudulently has
concealed from a plaintiff facts necessary to put him on notice of a breach.”8?
“Frequently, determining whether the statute of limitations has been tolled
pursuant to the ‘discovery rule’ or due to fraudulent concealment requires a factual
inquiry not amenable to resolution on a motion to dismiss.”®° The Court agrees that
at this stage of the proceedings, the Court cannot determine whether the statute of
limitations has been tolled and the Motion to Dismiss the unjust enrichment claim

on this basis will be denied.
3. Individual Noteholders’ Breach of Contract Claim
The Complaint asserts a breach of contract claim on behalf of the Individual
Senior Noteholders against the CHS Defendants for unpaid amounts due on the
Senior Notes. The Complaint alleges that, at the time the Senior Note Debt was
incurred, Quorum and CHS operated as a single economic unit. The CHS
Defendants argue that the breach of contract claim must be dismissed because the
Complaint fails to allege facts to support an alter ego theory for lability.
“It is a general principle of contract law that only a party to a contract may
be sued for breach of that contract.”9! To state a cognizable claim to pierce the
corporate veil, a plaintiff must allege facts demonstrating the parent corporation's

8 Vichi v. Koninklijke Philips Electronics N.V., 85 A.3d 725, 789 (Del. Ch. 2014).
0 TT, of Florida, Inc. v. Terex Corp., 54 F.Supp.3d 320, 329 (D. Del. 2014),
% Wallace ex rel. Cencom Cable Income Pariners If, Inc. L.P. v. Wood, 752 A.2d 1175, 1180
(Del. Ch. 1999).
30

complete domination and control of the subsidiary “to the point that [the subsidiary]
no longer has legal or independent significance of [its] own.”®?
“Piercing the corporate veil under the alter ego theory ‘requires that the
corporate structure cause fraud or similar injustice.”®3 In other words, the plaintiff
must allege that the corporation is a sham and exists for no other purpose than as a
vehicle for fraud.
The CHS Defendants argue that the Plaintiffs alter ego theory is implausible
because after the Spin-Off (and at the time of the default), Quorum was a publicly
traded company that had operated independently for years. The Defendants claim
that Quorum autonomously managed the hospitals in its portfolio, renegotiated its
debt instruments, divested assets, and eventually filed bankruptcy without the
involvement of its former parent. The CHS Defendants argue these actions do not
support a “sham entity” theory.
In response, the Plaintiffs argue that the legally relevant time for the alter

ego allegations is the time the Spin-Off Debt was incurred. The Plaintiffs contend
that the Complaint contains numercus allegations supporting the alter ego claim,
including (i) that Quorum was insolvent and inadequately capitalized from
inception, (ii) that Quorum’s only functioning officers prior to the Spin-Off were
CHS employees who would either resign from Quorum or retire shortly before or
immediately after the Spin-Off; Gi) that CHS inflated projections and falsified
financials to dupe lenders into lending funds to Quorum; (iv) that the amount of the

92 fd. at 1183-84,
98 fd. at 1184.
a4 Td.
31

debt raised by Quorum was not based on Quorum’s needs, but was designed to
offload CHS’s debt problem onto Quorum without regard for Quorum’s financial
well-being.
“The alter ego doctrine is used to pierce the corporate veil when a corporation
has created ‘a sham entity designed to defraud investors and creditor.”®5 The Court
is satisfied that the Complaint contains sufficient factual allegations to support the
alter ego theory. The Motion to Dismiss Count Twelve is denied.
CONCLUSION
For the reasons stated herein, the Court concludes that the CHS Defendants’
Motion to Dismiss will granted, in part, and denied, in part, as follows:
(i) The Motion to Dismiss will be GRANTED as to Counts I and II
(Avoidance and Recovery of the Spin-Off Dividend as a Constructive and Intentional
Fraudulent Transfer under 11 U.S.C. §§544 and 550 and Applicable State Law); and
Gi) The Motion to Dismiss will be DENIED as to Count XII (Breach of
Contract for Unpaid Amounts Due on the Senior Notes), Count XIII (Illegal -
Dividend Under Delaware Law), Count XIV (Aiding and Abetting legal Dividend),
and Count XV (Unjust Enrichment).
An appropriate Order follows.
FOR THE COURT:

Dated: March 16, 2023 Ce ‘LINE? AN/SHANNON
United States Bankruptcy Judge
9% In re Verizon Ins. Coverage Appeals, 222 A.3d 566, 577 (Del. 2019).
32

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10456162. Public record. Not legal advice.