In re Schneider

1

In ReRAYMOND JOSEPH SCHNEIDER Debtor-In-Possession

No. 23-10337

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

February 27, 2024

This Opinion Is Not Intended For Publication

Chapter 11

Christopher P. Schueller, Esq.

Douglas Haman, Esq.

Patricia B. Fugee, Esq.

Whitney L. Mosby, Esq.

Steven M. Hartmann, Esq.

Steven L. Diller, Esq.

Stefanie L. Deka, Esq.

MEMORANDUM OPINION GRANTING DEBTOR'S AMENDED MOTION TO VOLUNTARILY DISMISS CHAPTER 11 CASE [DOCKET NUMBER 308]

Beth A. Buchanan, United States Bankruptcy Judge

This matter is before this Court on the Debtor Raymond Joseph Schneider's Amended Motion to Voluntarily Dismiss Chapter 11 [Docket Number 308] (the "Motion to Dismiss"); Responses in support of dismissal filed by Creditors General Electric Credit Union, Civista Bank, First Merchants Bank, Transamerica Life Insurance Company, Rockland Trust Company, and Bank of America, N.A. and Merrill Lynch Pierce Fenner and Smith, Inc. [Docket Numbers 314, 319, 320, 338, 340 and 341]; and the Objection to Dismissal filed by Creditor The Huntington National Bank [Docket Number 323]. An evidentiary hearing was held on February 13, 2024 to come within the time limit set forth in 11 U.S.C. § 1112(b)(3).

I. Background Facts

A. Prepetition Relationship Between Mr. Schneider and Huntington National Bank

Raymond Joseph Schneider, who requests dismissal of his voluntary chapter 11 case, and The Huntington National Bank ("Huntington"), the creditor objecting to dismissal, have a pre-petition lending history that eventually brought the parties to litigation in state court and bankruptcy court.^[1] Mr. Schneider is a self-employed entrepreneur that develops real estate and operates businesses in an array of areas, including nursing homes, pet boarding and animal hospitals, apartment complexes, and other business ventures.

Mr. Schneider started out in the nursing home business. In 1999, while in the process of bidding to acquire a nursing home in Columbus, Ohio, Mr. Schneider met Harold Sosna. The two developed a partnership and from there developed five nursing home facilities over the next 18 years. The facilities were managed by Mr. Sosna's company, Premier Health Care Management, Inc. ("Premier"). Mr. Sosna also owned other nursing home facilities managed by Premier in which Mr. Schneider had no interest. Mr. Sosna was primarily responsible for arranging the financing for the Premier managed nursing home entities, including the entities in which Mr. Schneider and Mr. Sosna each held a 50% interest. Mr. Schneider was more of a silent partner who was not involved in the day to day operations of Premier or its entities.

On November 30, 2018, Mr. Sosna moved Premier's primary lending relationship from Fifth Third Bank to Huntington. At the hearing, Mr. Schneider testified that, prior to the lending relationship being moved to Huntington, he originally guaranteed only a portion of the loans, specifically those related to the entities for which he was 50% owner. However, Mr. Schneider testified that Huntington hired a CPA to audit Mr. Sosna and Premier prior to establishing the lending relationship. The audit uncovered concerns regarding Mr. Sosna and Premier, including a lack of sufficient funds in bank accounts and problem checks. The audit led the CPA to conclude that Huntington should not make the loans to Mr. Sosna. According to Mr. Schneider's testimony, Huntington then changed the loan documents to make Mr. Schneider responsible as guarantor for the entirety of the loans. Although Mr. Schneider signed the documents, he says he never met a banker or other representative of Huntington. Huntington and other lenders provided a $71,191,999.90 term loan and a $5,000,000 line of credit to Premier managed nursing home entities.

Mr. Schneider testified that, unbeknownst to him, Mr. Sosna began a check kiting scheme. The scheme eventually resulted in the loss of tens of millions of dollars. Mr. Schneider testified that he did not become aware of the check kiting scheme until May 26, 2020, when he received a notice from Mr. Sosna's attorneys that Mr. Sosna had been arrested for kiting. Mr. Sosna was indicted, convicted, and sentenced to prison for his crimes.

On June 5, 2020, Huntington filed a complaint against Mr. Sosna and his wife, and Mr. Schneider seeking to enforce the guarantees on the loans. On December 13, 2022, the state court entered a judgment against Mr. Schneider in the amount of $75.6 million plus accruing interest from July 28, 2020. After crediting for Huntington's sales of collateral owned by other entities, Huntington's judgment was reduced to approximately $27 million. Soon after it was rendered, Huntington took actions to freeze Mr. Schneider's accounts and to appoint a receiver over Mr. Schneider's assets.

Mr. Schneider appealed Huntington's judgment and also filed a complaint against Huntington and certain of its officers and employees for their alleged negligence in fostering and enabling Mr. Sosna's manipulation of funds [Docket Number 342, Exs. 2 and 3].

B. Mr. Schneider's Bankruptcy Filing and Huntington's Motion to Appoint a Trustee

Mr. Schneider filed a "bare bones" chapter 11 bankruptcy petition on March 2, 2023 [Docket Number 335, Ex. A]. Mr. Schneider testified that the filing was on the eve of a garnishment hearing initiated by Huntington to seize Mr. Schneider's brokerage account. He said that the tax implications of liquidating his brokerage account would have put him out of business.

Six days after the bankruptcy filing, Huntington filed an emergency motion to appoint a chapter 11 trustee [Docket Number 13]. In it, Huntington alleged that Mr. Schneider engaged in fraudulent transfers and other tactics to remove his assets from the reach of Huntington. Huntington maintained that a chapter 11 trustee was essential to ensure the thorough, independent investigation and prosecution of the alleged fraudulent transfers and to preserve the integrity of the bankruptcy process.

Mr. Schneider disputed any allegations of fraud or other wrongdoing. He asserted that Huntington's motion to appoint a trustee was an effort to pressure him against pursuing his state court complaint against Huntington. Mr. Schneider noted that-with the exception of Huntington-the numerous other loans that he guaranteed were current and the underlying projects were performing well. He further maintained that his transfer of business interests to family gift trusts were in connection with legitimate estate planning, which he began in April of 2018 well before the issues with Huntington arose. As a man reaching his 70's and retirement, he felt it was prudent to prepare an estate plan and hired the Vorys law firm to assist in that plan. Because of his numerous business and real estate holdings, the estate plan was complex and took time to complete.

Regardless, he intended to propose a 100% plan to repay his creditors so there would be no need to pursue or recover any alleged fraudulent transfers.

Following an expedited hearing held on March 15 and 17, 2023, this Court denied Huntington's emergency motion to appoint a chapter 11 trustee [Docket Number 78]. In denying the motion, this Court noted that the facts surrounding Mr. Schneider's transfers to family gift trusts occurring sometime between April of 2018 and December of 2020 and his financial condition at the time of the transfers was vague. This was likely because of the exigencies leading to the bankruptcy filing and the filing of Huntington's emergency motion which did not allow the parties sufficient time to conduct much discovery. Given that Huntington carried the burden of proof, this Court concluded that Huntington failed to establish the transfers were fraudulent or "cause" to appoint a trustee nor did the equities favor appointing a trustee, at least at that time. Nonetheless, this Court noted that Huntington continued to have avenues available to investigate Mr. Schneider's transfers to the family gift trusts including that "Huntington can file a motion for a Rule 2004 examination of Mr. Schneider or other relevant entities and request appropriate documents in connection therewith." [Id., p. 22].

C. Huntington's Motion to Conduct a Rule 2004 Exam and the Parties' Discovery Issues

Following this Court's denial of its motion to appoint a trustee, Huntington filed a motion to conduct a Rule 2004 examination with respect to Mr. Schneider and third parties targeting information on his prepetition transfers to the family gift trusts as well as other issues [Docket Number 92]. By agreed order entered July 20, 2023 [Docket Number 140], Mr. Schneider agreed to answer interrogatories and produce documents by August 26, 2023.

On October 24, 2023, Huntington filed a motion to compel [Docket Number 221] asserting that Mr. Schneider failed to provide complete responses to the Rule 2004 written discovery requests by the deadline and by the good faith extensions of the deadline granted by Huntington. At a December 12, 2023 status conference, Mr. Schneider's counsel informally agreed to turning over information to Huntington by the end of the month.

D. Reversal of Huntington's Judgment and Next Steps in State Court Litigation

On December 29, 2023, the Court of Appeals for the First Appellate District of Ohio issued its judgment entry and opinion reversing Huntington's judgment against Mr Schneider and remanding the case back to the Hamilton County Court of Common Pleas [Docket Number 342, Ex. 1]. In its opinion, the Court of Appeals noted that the lower court had granted summary judgment in favor of Huntington on its claim against Mr. Schneider for breach of a "Guaranty" agreement. However, the Court of Appeals concluded that "Schneider...