In re LPN Healthcare Facility Inc.

531 B.R. 730

In re LPN Healthcare Facility Inc., Debtor.

Case No. 09–64850

United States Bankruptcy Court, S.D. Ohio, Eastern Division.

Signed June 5, 2015

David M. Whittaker, Laura M. Zaremski, for Columbus, OH.

MEMORANDUM OPINION AND ORDER GRANTING TRUSTEE'S MOTION APPROVING COMPROMISE (DOC. NO. 650)

CHARLES M. CALDWELL, Judge

This Memorandum Opinion and Order serves as the Court's findings of fact and conclusions of law for the Motion Approving Compromise filed by the Chapter 7 Trustee, William B. Logan, Jr. (“Trustee”), and the lone Objection by a creditor, Autumn Health Care, LLC (“AHC”). The Trustee seeks resolution of an adversary proceeding (No. 12–2471) commenced against Michael B. Johnson, Sr., Michelle Ghiloni as Executor for the Estate of Sarah Johnson, and the Johnson Life Insurance Trust (“Defendants”). Based upon testimony and other evidence, the Court approves the proposed compromise. A brief history illustrates the bases for the Court's ruling.

On December 21, 2009, LPN Healthcare Facility Inc. (“LPN”) filed under Chapter 11 of the United States Bankruptcy Code (“Code”). At the time, LPN operated a licensed, 81–bed skilled care nursing home facility in Newark, Ohio. Sara Johnson, the recently deceased mother of Michael B. Johnson, Sr. and Michelle Ghiloni, founded and operated LPN that was in business for approximately forty years. A decline in patient census and reduction in governmental reimbursements prompted the bankruptcy filing. Despite the best efforts of the parties and retained professionals, twelve months later, on December 21, 2010, LPN auctioned all its assets, and AHC successfully bid $3,650,000.00 for their acquisition. The Court approved the sale to AHC on December 28, 2010. Additionally, the sale order provided means for post-sale collections, accounting, and the division of other rights and responsibilities between LPN and AHC, including the filing of reports with regulatory authorities. Essentially, the case appeared over and done, and receded from the public docket.

However, approximately a year later, on January 4, 2012, the U.S. Trustee (“UST”) filed a Motion to Convert to Chapter 7 or Dismiss because LPN had not filed a monthly financial report since December 2010. On January 26, 2012, the Court entered an Agreed Order between LPN and the UST stating that it would file all of the missing financial reports and remain current along with filing a liquidating plan, or else the U.S. Trustee could submit a conversion order to the Court, without further notice or hearing. Despite these efforts to regain control over the progress of the case, on February 15, 2012, the UST filed an emergency motion for the appointment of a Chapter 11 trustee, alleging that Michael B. Johnson, Sr., used funds from the sale to AHC for unauthorized personal purposes. The next day, the Court entered an Agreed Order requiring the appointment of a Chapter 11 trustee. On February 21, 2012, after a status hearing, the Court ordered the case converted to Chapter 7, prompting the appointment of the Trustee to investigate LPN's financial affairs, and take necessary actions to collect and liquidate remaining assets.

The pace quickly advanced and nine months later, on November 8, 2012, the Trustee filed an Adversary Proceeding that included thirteen claims against twelve Defendants (No. 122471). Those Defendants are Michael B. Johnson, Sr., Sara Johnson, Michelle Ghiloni (Guardian of Sara Johnson), Goosepond Retirement Village, Inc., George W. Fels, Si Digman, Si Digman, LLC, John Ghiloni, Michelle Ghiloni (Individually), Northtowne Senior Living Community, LLC., Business Men's Assurance Company of America, and the Johnson Life Insurance Trust. On January 11, 2013, Defendants Michelle Ghiloni (Guardian of Sara Johnson), Sara Johnson, the Johnson Life Insurance Trust, and Northtowne Senior Living Community, LLC filed two cross-claims against Defendant, Michael B. Johnson, Sr. In response, on February 12, 2013, he filed two cross-claims. This initial flurry of litigation was capped by the Trustee's filing of an Amended Complaint on March 25, 2013, adding a fourteenth claim, alleging conversion by Michael B. Johnson, Sr., Sara Johnson, Goosepond, and Northtowne.

Layers of complexity and conflict levels reached a zenith approximately one year later, when the Trustee filed a separate adversary proceeding against LPN's former Chapter 11 counsel for alleged professional negligence and breach of fiduciary duty (No. 13–2047). Note that the Trustee also previously asserted claims for alleged professional negligence, breach of fiduciary duties and unjust enrichment, against LPN's former Chapter 11 accountant in Adversary Proceeding Number, 12–2471. Based upon the Trustee and his Counsel's prescient request, on July 23, 2013, the Court consolidated the two adversaries, and referred the consolidated cases for mediation to the Hon. John E. Hoffman, Jr., U.S. Bankruptcy Judge. During the past nearly two years, the parties have engaged in extensive negotiations, including two all-day and into the night mediation sessions, conducted by Judge Hoffman. His skills along with those of the professionals involved, and the willingness of parties to cooperate despite hard-fought differences, bring us to the present opportunity to make a significant dent in the amounts owed, halt the accrual of legal fees and expenses, and close an unfortunate chapter in the lives of all concerned.

Specifically, without any admission of wrongdoing the Trustee settled with former Chapter 11 counsel resulting in the withdrawal of a final fee application for $33,858.16 and remission of $65,000.00 in compensation previously received. Likewise, without any admission of wrongdoing, the Trustee settled with the former Chapter 11 accountant, resulting in a $250,000.00 payment to the Chapter 7 estate. The Court approved settlements on March 11 and 12, 2014, with no objections from any creditors, including AHC. The parties continued to work, under the guidance of Judge Hoffman, to resolve the rest.

The virtues of patience and persistence were equal to the tasks. So, a year later on March 11, 2015, the Trustee filed the present Motion to Compromise with the remaining Defendants. Three of the original fourteen claims remain, totaling approximately $2.6 million dollars, and the compromise promises to resolve them all. It is best described as a global resolution of numerous and conflicting interests. The numbers received into evidence best tell the story.

As of April 3, 2015, the estate has $1,236,995.43 in cash on hand. The Trustee will receive an additional $1,000,000.00 from the remaining Defendants as part of the proposed compromise that includes:

• $164,511.41 currently in escrow from real estate sold by Michael B. Johnson, Sr.,

• An estimated $200,000.00 in proceeds from two parcels of real estate to be sold by the Executor of the Sara Johnson estate, and

• Approximately $635,488.59 from the Johnson Life Insurance Trust.

In addition to these cash payments, Michael B. Johnson, Sr. will withdraw with prejudice his disputed claim of $320.854.85. From the $1,000,000.00, the Trustee proposes to earmark $769.722.59 to pay an Internal Revenue Service (“IRS”) claim reduced by agreement from the filed amount ($996,234.05). Specifically, the IRS agreed to waive $226,511.46. According to evidence provided by the Trustee, after estimated settlement-related expenses are deducted ($188,000.00) along with the amount paid to the IRS (769.722.59), a net of $1,279,272.84 will remain. The Trustee can then use this balance to resolve the disputed secured claim ($395,222.86) of the Ohio Bureau of Workmen's Compensation (“Bureau”). Assuming payment in full to the Bureau, a balance of $884,049.98 will remain to liquidate total Chapter 11 administrative priority claims ($622,819.10)...