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In Re Brotman Medical Center, Inc v. Brotman Medical Center

January 7, 2011


The opinion of the court was delivered by: Cormac J. Carney United States District Judge



The issue before the Court on appeal is whether the Bankruptcy Court erred in granting Appellees' motion for summary judgment. Appellants contend that genuine issues of material fact exist, specifically concerning whether (1) Appellant Prospect Medical Systems, Inc. ("PMS") is the holder and owner of Claim 419, (2) Appellee Jacob Terner ("Dr. Terner") transferred the promissory note at issue to PMS, and (3) equitable subrogation should not be applied because Dr. Terner allegedly has unclean hands and inequity would result. Despite Appellants' arguments on appeal, the Bankruptcy Court did not err in granting summary judgment. The evidence in the record is insufficient to dispute that Dr. Terner holds and owns Claim 419 and never transferred the promissory note or Claim 419 to PMS. Appellant has also failed to raise a genuine issue as to whether the Bankruptcy Court correctly applied the doctrine of equitable subordination. Accordingly, the Bankruptcy Court's decision is AFFIRMED.


This appeal arises from a dispute as to the identity of the individual or entity that is entitled to pursue claim 419 ("Claim 419") filed against Debtor and Appellant Brotman Medical Center, Inc. ("Brotman"). The basis for Claim 419 is a subordinated promissory note ("Note") executed on August 31, 2005 by Appellee Herta and Paul Amir Family Trust ("AFT") and Brotman after AFT agreed to loan Brotman $1.5 million. Excerpts of Record ("ER") 15--17. After execution of the Note, AFT wired the $1.5 million to Brotman as promised. ER 259, 477. Following AFT's loan to Brotman, in September 2005, Prospect Medical Holdings ("PMH") acquired from Tenet Healthcare a 30% stake in Brotman. ER 258.

Dr. Terner has had significant involvement with both Brotman and the Prospect Entities.*fn1 Dr. Terner was a member of Brotman's Community Governing Board prior to PMH's September 2005 acquisition of a stake in Brotman. ER 258, 373 (Dr. Terner testifying in deposition that he resigned from Brotman's governing board "when it became apparent that a transaction [where PMH would acquire a stake in Brotman] was likely"). After PMH acquired its stake in Brotman, Dr. Terner became Chairman of Brotman's Board of Directors. ER 258. He was also CEO and a member of the Board of Directors of PMH as well as the sole shareholder of Prospect Medical Group, Inc. ("PMG") from September 1996 until May 2008. ER 258, 369.

An important motivation for the AFT loan to Brotman was that Dr. Terner, a close friend of the Amir family, solicited the loan. ER 258. Dr. Terner has represented-and it is undisputed on appeal-that he orally promised the Amir family that he would personally guarantee repayment of the loan. ER 258, 477; Reply at 1.

Brotman negotiated two extensions of the Note's maturity date and also made two payments reducing the Note's principal balance from $1.5 million to $1.15m. ER 477. Brotman stopped making interest or principal payments on the Note after March 2007. ER 52. In September 2007, Dr. Terner, through the J. Terner Family Trust, made a payment of $1,210,375.00 to AFT. ER 259, 278. This was the total amount due on the Note at that time.*fn2 Shortly thereafter, AFT executed a limited power of attorney granting Dr. Terner, in his individual capacity, the authority to act on behalf of AFT with respect to the sale, transfer, disposition, settlement, collection, or compromise of the Note. ER 259--60, 280.

Brotman filed for Chapter 11 bankruptcy on October 25, 2007. ER 478. Brotman's bankruptcy filings listed AFT as a creditor holding an unsecured non-priority claim in the amount of $1,210,375.00. ER 148 (further indicating that the AFT claim was not in dispute, not contingent, and not liquidated). Brotman's Second Amended Disclosure Statement Describing Second Amended Chapter 11 Plan of Reorganization Proposed by Brotman (dated November 3, 2008) also cited the AFT note as an unsecured liability of "approximately $1.2 million." ER 152.

In April 2008, Dr. Terner submitted a proof of claim, which was indexed as Claim 419, in the amount of $1,296,625.00-the amount paid by Dr. Terner plus default interest. ER 260, 282. The Bankruptcy Court found, and Appellants do not contest on appeal, that Dr. Terner filed the proof of claim on a pre-printed form ("Claim Form") generated by Brotman. ER 478; see also ER 260. The Claim Form listed "PROSPECT MEDICAL SYSTEMS" in the "Name of Creditor" blank. ER 282, 478. Dr. Terner filled in additional information including that notices regarding the bankruptcy should be sent to "Herta & Paul Amir Family Trust . . . c/o Jacob Y. Terner, M.D." at "Prospect Medical Holdings, Inc." ER 282. Dr. Terner also attached a copy of the Note and the limited power of attorney to the Claim Form. ER 283--301.

As part of negotiations surrounding Brotman's Plan of Reorgnization, PMS agreed to waive all of its claims against Brotman, purportedly including Claim 419. ER 311--12. Dr. Terner learned of the attempt by PMS to waive Claim 419 on or about January 9, 2009. ER 478.

On March 13, 2009, Appellees filed an adversary complaint against Appellants seeking declaratory relief concerning the parties' rights and obligations under the Note and Claim 419. ER 478. On April 13, 2009, the Creditors' Committee intervened in the adversary proceeding and the Brotman Creditor Trust (the "Creditor Trust") subsequently became the intervening party. ER 478. The Creditor Trust, Brotman, and PMS filed answers and counterclaims seeking a determination that Appellees had no interest in Claim 419, that Claim 419 should be denied and invalidated, and that the Note had been paid in full. ER 478. Thereafter, both Appellants and Appellees filed for summary judgment.

In an order dated June 11, 2010, the Bankruptcy Court granted summary judgment in favor of Appellees. ER 463--64. On July 8, 2010, the Bankruptcy Court issued its findings of fact and conclusions of law supporting its grant of Appellees' motion for summary judgment. ER 476--80. Finally, the Bankruptcy Court entered judgment on July 14, 2010. ER 490--91. The Appellants challenge these rulings on appeal.

The Bankruptcy Court made several findings of fact and conclusions of law relevant to this appeal. Specifically, the Bankruptcy Court found that the Claim Form was pre-printed, generated by Brotman, and listed PMS as the creditor before Dr. Terner-who believed the Claim Form was a generic form-inputted additional information concerning the Note, AFT, and the amount owed. ER 478. The Bankruptcy Court determined that there was "no evidence that the Note was assigned [by Dr. Terner] to Prospect, either orally or in writing." ER 478, 479. The Bankruptcy Court further found that "[d]espite Prospect's attempt to waive the claims arising from the Note, no such claims, including Claim No. 419, have been waived or extinguished." ER 478. Finally, the Bankruptcy Court's legal conclusions included that Claim 419 was "valid and enforceable," Dr. Terner could enforce the Note against Brotman under the doctrine of ...

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