The opinion
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
CRAIG T. GOLDBLATT pp, 824 N. MARKET STREET
JUDGE 4 WILMINGTON, DELAWARE
CA fy. (302) 252-3832
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May 1, 2024
VIA CM/ECF
Re: In re Promise Healthcare Group, LLC, et al., No. 18-12491; Michaelson
v. L.A. Downtown Medical Center, LLC, Adv. Proc. No. 2383-50335
Dear Counsel:
To begin, the Court wants to apologize to the parties for the fact that these
motions have been under advisement for far longer than they ought to have been.
The Court appreciates the parties’ patience.
k ek O*
During their bankruptcy cases, the debtors sold a facility to L.A. Downtown
Medical Center under § 363 of the Bankruptcy Code.! The terms of the transaction
provided that a portion of the purchase price would be paid over time, with those
future payment obligations reflected in a note. The asset purchase agreement created
1 See D.I. 1 § 44. Promise Healthcare Group, LLC and its affiliated debtors are referred to
as the “debtors,” or the “seller.” Defendant L.A. Downtown Medical Center is herein referred
to as “buyer” or “defendant.”
Page 2
a mechanism that permitted the buyer to set off, against those future payment
obligations, certain liabilities for which the seller retained responsibility.
In September 2020, the Court entered an order confirming the debtors’
liquidating plan. The trustee appointed to administer the liquidating trust succeeded
to the rights of the debtors and is the plaintiff in this adversary proceeding.2 The
buyer has withheld certain amounts that the seller contends are due and owing under
the parties’ agreement. The seller has thus filed this lawsuit asserting a breach of
the asset purchase agreement.3 To that end, the complaint asserts four counts: Count
I seeks a declaration that the buyer is in default, Count II asks for declaratory
judgment that the buyer has improperly set off certain amounts from the payments
it has made under the note, Count III is for breach of contract as it relates to how the
parties allocated responsibility for certain payables due to, and receivables due from,
the State of California. Count IV alleges a breach of the implied covenant of good
faith.4 In a letter ruling dated September 5, 2023, the Court denied, without
prejudice, the buyer’s motion to dismiss Counts II & IV. The buyer now moves for
judgment on the pleadings on Counts I & III. The seller similarly seeks judgment on
the pleadings on Count I.
2 In re Promise Healthcare Grp., LLC, No. 18-12491 (Bankr. D. Del.), D.I. 2072. Citations to
materials filed on the docket in these bankruptcy cases are cited as “Main Case D.I. ___.”
3 The asset purchase agreement is referred to as the “APA.”
4 See, D.I. 1.
Page 3
For the reasons described below, both motions for judgment on the pleadings
with respect to Count I will be denied on the ground that the claim is moot. The note
matured in accordance with its terms on September 4, 2023. And under the terms of
the Note, the only material consequence of a default is an acceleration of the note.
Accordingly, whether the buyer had previously defaulted on the note turns out to
make no difference to the parties’ substantive rights.
The complaint and the motions describe in substantial detail the APA’s
mechanic under which the buyer may affect a setoff. This includes an elaborate
procedure under which the seller may contest a setoff that the buyer intends to take.
When such a setoff is contested, the buyer is required to contribute the disputed
amount into escrow. Both parties argue that the other party has failed to comply
with these procedures. But as far as the motions now before the Court go, these
disputes bear only on the request in Count I that the Court declare that the buyer
has defaulted under the note. Because that request for relief is now moot, the Court
will address the substance of these assertions in only general terms.
The buyer’s motion with respect to Count III relates to an amendment to the
APA (the Second Amendment). That amendment changed the allocation of
responsibility for amounts owed to, and the right to receive payables from, the State
of California. The question is whether the change made at the time of the Second
Amendment applied only to amounts billed and paid as of the closing of the
transaction, or also covered amounts that would be billed and paid thereafter. The
language of the agreements makes clear that the Second Amendment addressed only
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the provisions of the original APA that applied to the amounts billed and paid prior
to the closing. The terms of the original APA regarding amounts that are billed or
paid after the closing remain in effect. The buyer is thus entitled to judgment on the
pleadings on that issue.
The Court appreciates that this resolution of the pending motions leaves others
matters in the litigation unresolved. The Court will accordingly set a status
conference in order to discuss with counsel appropriate procedures for the Court to
consider the remaining disputes between the parties.
Factual and Procedural Background
The debtors operated short- and long-term medical care facilities.5 Before they
filed for bankruptcy, the debtors negotiated an asset purchase agreement for a sale
of the Silver Lake Medical Center to LADMC.6 The debtors filed a chapter 11 petition
on November 5, 2018. The next day, the debtors moved the Court to approve bid
procedures under which LADMC would serve as the stalking-horse bidder for the
facility.7
5 On these cross motions for judgment on the pleadings under Civil Rule 12(c), the Court
views “the facts presented in the pleadings and the inferences to be drawn therefrom in the
light most favorable to the nonmoving part.” Wolfington v. Reconstructive Orthopedic
Associates II PC, 935 F.3d 187, 195 (3d Cir. 2019) (internal citation omitted). The Court “may
not grant the motion unless the movant clearly establishes that no material issue
of fact remains to be resolved and that he is entitled to judgment as a matter of law.” Id.
(internal citation omitted). Accordingly, the Court “may only consider the complaint, exhibits
attached to the complaint, matters of public record, as well as undisputedly authentic
documents if the complainant’s claims are based upon these documents.” Id. (internal
citations omitted).
6 D.I. 1-2 at 1 (dated October 24, 2018).
7 D.I. 1 ¶ 23 (admitted in answer).
Page 5
1. The operative documents: The APA, the Second Amendment and the Note.
The stalking horse asset purchase agreement provided that the purchase price for
the sale of the facility would be $84.15 million, subject to certain adjustments.8 The
agreement further contemplated that $76.05 million of that price would be paid at
closing, with the remaining amount ($8.1 million) to follow in deferred payments.9
The parties subsequently memorialized these deferred obligations in a note providing
for nine semi-annual payments of $900,000, plus applicable interest.10
In December 2018, the Court entered the bid procedures order.11 The debtors
did not receive other qualified bids. The debtors, therefore, as provided in the bid
procedures order, cancelled the auction and sought authority to sell the facility to
LADMC under the terms of the stalking horse asset purchase agreement.12
The State of California, however, had objected to the sale on the ground that it
purported to sell the facility free and clear of liabilities that had not yet been assessed
under the state’s Hospital Quality Assurance Fee program.13 The parties negotiated
extensively to resolve California’s objections.14 The Court ultimately approved the
8 D.I. 1-2 § 3.1.
9 Id. § 3.3(d), 3.4.
10 D.I. 1-4.
11 D.I. 1 ¶ 24 (admitted in answer).
12 D.I. 1 ¶ 25 (admitted in answer).
13 See Main Case D.I. 489.
14 D.I. 1 ¶¶ 35-42; D.I. 37 ¶ 36 (buyers “[a]dmitted that the Parties engaged in negotiations,
including how to address the QAF liabilities that the State of California had not yet assessed
against” the Silver Lake Medical Center.)
Page 6
transaction by order dated February 13, 2019.15 The complaint alleges, and the
answer acknowledges, that the parties entered into the Second Amendment to the
APA on the same day that the Court approved the sale.16 As will be further described
below, the parties now dispute the effect of the Second Amendment on their
respective rights and obligations related to the Hospital Quality Assurance Fee
program.17
2. The setoff mechanism. Under the APA, the seller remained
responsible for certain liabilities that might be charged to the buyer after the closing
(the “excluded liabilities”). In substance, the APA permits the buyer to deduct, from
its payment obligations under the note, any excluded liabilities that it paid.18 (In
addition, the APA’s mechanic for truing up amounts due related to the QAF Program,
which is discussed in further detail below, was through the same setoff mechanism.)
Much of the complaint is focused on disputes between the parties relating to these
setoffs.19 The seller challenges both the buyer’s entitlement to make certain
deductions on the merits as well as the buyer’s compliance with the APA’s specified
procedures for effecting such setoff.
15 Main Case D.I. 740.
16 D.I. 1-3 (referred to as “Second Amendment”). D.I. 1 ¶ 42, 44; D.I. 37 ¶ 42, 44.
17 The Hospital Quality Assurance Fee Program is referred to as the “QAF Program.”
18 D.I. 1-2 §3.4
19 D.I. 1 ¶¶ 49-99.
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The note describes a process of claiming and objecting to these offsets. In
substance, if the buyer intends to affect a setoff, it is required to give notice to the
seller of its intent.20 If the seller disputes that claim of setoff, it must advise the
buyer of the dispute. Upon receiving such a notice, the buyer then has 30 days to
place the disputed funds into escrow, where they remain until the dispute is resolved.
Amounts that the buyer indicated it would set off that were not contested by the seller
could be offset and are considered a payment under the note.21
3. The QAF Obligations. Under the QAF Program, the California Department
of Health Service collects fees from all hospitals. Those fees are then distributed to
hospitals based on the services those hospitals provided to patients who are
uninsured, or are covered by Medi-Cal, the state’s program that provides medical
insurance to low-income residents.22 The calculation of both the amounts that
hospitals owe to the Department, and the amount they are entitled to receive from
the Department, are based on the services the hospital provided within a relevant
time period. Importantly, those calculations were at times made years after the
relevant time period, which meant that hospitals would receive, from the
Department, both payments and bills that relate to services the hospital had provided
as much as several years earlier.23
20 D.I. 1-4 § 3(b).
21 Id.
22 D.I. 1-2 Annex 1.1 at 14; In re Promise Healthcare Group, LLC, No. 23-50335, 2023 WL
4476134 (Bankr. D. Del. July 11, 2023) at *7.
23 D.I. 1 ¶ 27; D.I. 37 ¶ 27 (admitted).
Page 8
Under the APA, the basic understanding was that the seller would retain
responsibility for fees related to services provided before the closing, while
responsibility for fees that relate to services provided after the transaction closed
would be borne by the buyer.
A. Treatment of the QAFs under the original APA. The original APA
sought to memorialize this understanding through a series of different provisions.
First, the APA addressed how the seller would be compensated for QAF payments
(and charged for QAF obligations) with respect to cash that came in, and bills
received, in the period between the time the agreement was negotiated (in September
2018) and the date on which the transaction closed (in March 2019). The mechanic
reflected in the agreement was that the buyer was required to make a good faith
estimate of what it expected these amounts to be at the time of the closing.24 The
amount the buyer paid at closing reflected that estimate.25
Thereafter, the buyer had 120 days to determine this amount with greater
precision. The APA provides that once that is finally determined, the adjustment
(whether it turns out to increase or decrease the amount owed to the seller) would be
captured by increasing or decreasing the amount paid at the time of the semi-annual
payments due under the note (including by setting off the amount from the note
24 D.I. 1-2, Annex 1.1 p. 6-7.
25 See D.I. 1-2 §§ 3.1, 3.7, 3.9.
Page 9
obligation, if the amount was a net credit to the buyer). These obligations are
reflected in § 3.7 of the original APA.26
Second, the APA contained a separate set of provisions that addressed
payments and bills received after the closing. These amounts were also addressed by
making adjustments to the semi-annual payments due under the note (again,
including by means of a setoff if the adjustment was a net credit to the buyer). These
obligations are reflected in § 13.4 of the APA.27
B. Changes to the QAF Adjustments under the Second Amendment.
The Second Amendment made two specific changes to the original APA related
to the QAF Program. First, the parties eliminated the process by which the buyer
made a good faith estimate of the QAF obligations and receipts in the period from the
time the transaction was negotiated through closing. That process was replaced, in
the Second Amendment, by a specific amount that had been agreed by the parties.
This change is implemented by § 3 of the Second Amendment.28
Second, the parties replaced certain provisions of § 3.7 that relate to truing up
these estimates to the actual QAF payments and obligations for this period after the
passage of 120 days. The original agreement provided that these amounts would be
trued up by adding or subtracting to the amounts paid in the semi-annual payments
under the note. These provisions were revised so that, if the buyer were in a net
26 D.I. 1.2 § 3.7.
27 D.I. 1.2 § 13.4; D.I. 1-4 § 3(a)(iii).
28 D.I. 1-3 § 3.
Page 10
payable position, it would be obligated to pay that amount in two equal payments to
be made in August 2019 and February 2020. If, however, the buyer turned out to be
in a net receivable position, the buyer could set off those amounts from its obligations
under the note. These changes are implemented by §§ 4 and 5 of the Second
Amendment.29
4. The parties’ performance under the agreements. Much of the complaint and
briefing now before the Court is dedicated to addressing a series of disputes that have
arisen between the parties regarding compliance with the APA’s procedures for
claiming and disputing the right to set off amounts otherwise due under the note as
they relate to excluded liabilities. As further described below, however, these factual
details turn out not to affect either party’s entitlement to the relief sought in the cross
motions for partial judgment on the pleadings. Rather, the only fact that turns out
to be material to these disputes is that the note matured on September 5, 2023, when
the final payment thereunder became due. This Court heard argument on the cross
motions for judgment on the pleadings on October 26, 2023.30
Jurisdiction
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) as
a matter “arising in” Title 11.31 As a case within the district court’s bankruptcy
29 D.I. 1-3 §§ 4-5.
30 See D.I. 58.
31 This Court previously expressed concern over its jurisdiction to hear this case under
§ 1334(b)’s grant of “related to jurisdiction.” However, as the Court noted in its prior letter
Page 11
jurisdiction, it has been referred to this Court under 28 U.S.C. § 157(a) and the
district court’s standing order of reference.32 Because this Court has jurisdiction to
enforce its own orders, this is a core matter under § 157(b).33
Analysis
Both parties move for judgment on the pleadings pursuant to Federal Rule of
Civil Procedure 12(c), as made applicable to this adversary proceeding under Federal
Rule of Bankruptcy Procedure 7012. Such a motion is appropriate where “there are
no material issues of fact, and [the movant] is entitled to judgment as a matter of
law.”34 When determining whether certain material facts are disputed, courts should
consider the effect of any denials in the defendant’s answer to the complaint. That
is, the allegations within the answer are assumed true when the answer either admits
or does not deny them.35 The facts that are truly undisputed, however, must be
viewed in the light most favorable to the nonmoving party.36 Finally, courts must
generally confine their analysis to the pleadings, i.e., the complaint and the answer,
although courts may also consider written instruments attached to the pleadings.37
ruling, the relief sought by the parties is sufficiently related to the enforcement of the APA
that any violations of the APA constitute a violation of this Court’s order approving the APA.
32 Amended Standing Order of Reference from the United States District Court for the
District of Delaware, dated Feb. 29, 2012.
33 Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009).
34 Sikirica v. Nationwide Ins. Co, 416 F.3d 214 (3d Cir. 2005).
35 See United Food & Comm. Workers, Loc. 1995 v. Kroger Co., 51 F.4th 197, 202 (6th Cir.
2022) (citing 61A Am. Jur. 2d § 497).
36 Great Lakes Ins. SE v. Raiders Retreat Realty Co., LLC, 47 F.4th 225, 228 (3d Cir. 2022).
37 Fed. R. Civ. P. 10(c).
Page 12
I. The motions for judgment on the pleadings with respect to Count I
will be denied; Count I will be dismissed as moot.
Seller contends that the buyer’s failure to place certain amounts in escrow in
March 2022 and September 2022 amounted to events of default under the terms of
the note. Seller further contends that the buyer’s failure to make the September 2022
payment on the note also amounted to an event of default. In Count I of the
complaint, seller seeks a declaration to that effect. The seller’s motion for judgment
on the pleadings seeks the entry of judgment on this count.
In response, the buyer argues that the notices seller sent failed to comply with
the objection procedures set out in the APA. And buyer contends it subsequently
cured its failure to make the payment required in September 2022. Buyer thus cross
moves for judgment on the pleadings on this count.
By the time the Court heard argument on the motions, however, the note had
matured. And the terms of the note make plain that the only material consequence
of a default is that it causes the remaining amounts due under the note to
accelerate.38 But while acceleration of the remaining amounts due under the note
might have made a difference before the note matured in September 2023, that set of
issues has now been overtaken. There is no longer any dispute that all amounts due
38 See D.I. 1-4 § 5 (“Upon the occurrence and during the continuance of any Event of Default
… [seller] may … declare, by notice to [buyer], all amounts payable hereunder to be and
become immediately due and payable, whereupon such amounts shall be immediately due
and payable in full.”)
Page 13
and owing under the note are now in fact due. The only question is to determine what
is in fact owed.
For that reason, granting the seller a declaration that the buyer had defaulted
under the note would not entitle the seller to any concrete relief to which the seller is
not already entitled. The law is clear that a claim is moot when “the issues presented
are no longer live or the parties lack a legally cognizable interest in the outcome.”39
The touchstone of the mootness doctrine is the “court’s ability to grant effective
relief.”40 Accordingly, “if developments occur during the course of adjudication that
eliminate a plaintiff's personal stake in the outcome,” the claim is moot.41 That is
precisely the case here. The Court will thus deny the cross motions for judgment on
the pleadings on Count I and will dismiss that count as moot.
II. The Court grants the buyer’s motion for judgment on the pleadings on
Count III.
The dispute between the parties related to Count III turns on the question
whether the Second Amendment to the APA addresses all QAF offsets or only those
arising out of payments and bills received prior to the time of the closing. The bills
received after the closing, but that relate to procedures performed before the closing,
exceed the payments that relate to the same period. As a result, the buyer would be
entitled to a net payment from the seller on account of this period if that right were
39 Donovan ex rel. Donovan v. Punxsutawney Area Sch. Bd., 336 F.3d 211, 216 (3d Cir. 2003)
(internal quotations and citations omitted).
40 Id. (citation omitted).
41 Id. (citations and internal quotations omitted).
Page 14
not eliminated in the Second Amendment. The buyer contends that the Second
Amendment did not eliminate that right, and thus set off the amount to which it
claims to be entitled from its payments under the note. The seller contends that the
buyer is not entitled to this setoff on account of the Second Amendment. Count III
seeks damages on account of this setoff, which the seller argues was improperly
taken. The buyer now seeks judgment on the pleadings with respect to this count.
Because the plain text of the agreement makes clear that the Second
Amendment changed the parties’ rights and obligations only with respect to amounts
paid and bills received before the closing, the buyer is entitled to motion for judgment
on the pleadings on Count III.
As explained above, the basic economics of the transaction were that the seller
retained responsibility for QAF bills related to procedures that occurred before the
transaction closed and was entitled to QAF payments related to those same
procedures. As originally drafted, the agreement provided that the buyer would
estimate, in advance of closing, what these amounts would be for payments and bills
received before the closing, with a true up to occur within 120 days. The Second
Amendment to the APA scrapped the buyer’s obligation to estimate the amount,
replacing it with a fixed sum.42
The dispute between the parties is whether, when the parties made this
change, they also eliminated the buyer’s right to reduce its note obligation to the
42 D.I. 1-2 § 3.7, Annex 1-1 p. 9; D.I. 1-3 § 3.
Page 15
seller for net liabilities it incurred to the State of California related to bills and
payments received after the closing that were for procedures performed before the
closing. (Because that is a mouthful, the net obligation for bills and payments
received after the closing, but that relate to procedures that occurred before the
closing, will be referred to as the “disputed QAF responsibilities”.) Otherwise put,
the question is whether the Second Amendment may be fairly read to change the APA
so that the buyer was required to retain (rather than set off against the note) the
disputed QAF responsibilities.
If the contracts are ambiguous in any way, meaning that the provisions in
controversy are “reasonably or fairly susceptible of different interpretations or may
have two or more different meanings,” the Court must deny the motion.43 The seller
insists that the substance of the agreement that was struck at the time California’s
objections were resolved, the parties entered into the Second Amendment, and the
Court approved the sale was that the buyer would take on the disputed QAF
responsibilities. The seller contends that extrinsic evidence will support its
construction and argues that the Court should deny the motion and provide it the
opportunity to provide such evidence. But that kind of evidence may properly be
considered only if the language of the agreement is ambiguous.44 Where the contract
43 Lillis v. AT&T Corp., 904 A.2d 325, 330 (Del Ch. 2006) (quoting Rhone-Poulenc Basic
Chems. v. Am. Motorists Ins., 616 A.2d 1192, 1196 (Del. 1992).
44 GMG Cap. Invs. v. Athenian Venture Partners I, L.P., 36 A.3d 776, 783 (Del. 2012).
Page 16
itself is unambiguous, the Court’s obligation is simply to enforce it according to its
terms.45
The seller argues that the specific amounts set forth in the Second Amendment
were intended to provide that the buyer would be “fully credited” for its right to
recover on the disputed QAF responsibilities. The text of the relevant provision of
the APA provides:
If, after the Effective Time, Buyer or the Hospitals… receive a bill or
invoice from the State of California on account of the QAF4 Program,
then the amount shown as due to the State of California on account of
the QAF4 program will be deducted (i) first from [amounts received from
the State on account of the QAF program] and (ii) next, from each of the
next Deferred Payments (including amounts added to Deferred
Payments under this Section 13.4) until fully credited to the Buyer.46
The seller’s argument is that the fixed amount set forth in the Second Amendment
operated to ensure that the buyer was “fully credited” for the disputed QAF
obligations, such that the buyer was no longer entitled to set off those amounts from
the “Deferred Payments” (meaning, the note).
There is nothing, however, in the Second Amendment that supports such a
conclusion. The provision of the original APA that authorizes the seller to set off the
disputed QAF responsibilities is § 13.4(d). And importantly, nothing in the Second
Amendment alters that section in any way.
The only provisions of the Second Amendment that relate to the QAF program
are §§ 3-5. As described above, § 3 operated to replace the buyer’s good faith estimate
45 Lillis, 904 A.2d at 329.
46 D.I. 1-2 § 13.4(d).
Page 17
of pre-closing bills and payments with fixed amounts. Nothing in the language
purports to address the disputed QAF responsibilities, which are for bills and
payments received after the closing.
Sections 4 and 5 of the Second Amendment relate to the same set of bills and
payments. The original APA trued up the actual amounts owed to the seller by
increasing the principal of the note. These paragraphs replace that obligation with a
separate obligation to pay the seller in two payments of equal amounts in August
2019 and February 2020. Again, however, nothing in this language suggests that
these changes have any application to bills and payments received after the closing.
The seller offers a series of complex arguments in an effort to suggest that the
agreement is at least amenable to a construction under which the Second Amendment
eliminated the buyer’s right to set off the disputed QAF responsibilities.47 None of
those arguments succeed in rendering the agreement ambiguous. There is no dispute
that (a) the provision of the original APA that entitled the buyer to set off the disputed
QAF responsibilities was § 13.4 and (b) the text of Second Amendment did not purport
to delete or amend that section. The Court accordingly concludes that the agreement
is unambiguous, such that the seller may not offer extrinsic evidence to suggest that
the agreement in fact has some different meaning. The buyer is entitled to judgment
on the pleadings on Count III.
47 See D.I. 36 at 14-19.
Michaelson v. L.A. Downtown Med. Ctr., Adv. Proc. No. 23-50335
May 1, 2024
Page 18
Conclusion
For the foregoing reasons, the Court (a) will deny both parties’ motions for
judgment on the pleadings on Count I and will dismiss that count as moot and (b) will
grant the buyer’s motion for judgment on the pleadings on Count III. A separate
order will issue. In addition, chambers will reach out to the parties in order to set a
status conference to discuss the most appropriate means of advancing the remaining
issues in this adversary proceeding towards resolution.
Sincerely,
Craig T. Goldblatt
United States Bankruptcy Judge