Montoya v. Lieberman (In re Santa Fe Med. Grp., LLC), Case No. 15-11247 t

OPINION

In this action, Plaintiff seeks to recover as fraudulent transfers $575,000 in pre-petition payments made by the debtor to Defendant. After a trial on the merits, the Court rules that the debtor did not receive reasonably equivalent value for the payments, and became insolvent by September 30, 2013. The Court also concludes that pre-judgment interest should be awarded from the date demand was made, at the current "Wall Street prime" rate. Based on these findings and conclusions, the Court will enter judgment in Plaintiff's favor for $452,093.75.

The Court finds the following facts:¹

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Santa Fe Medical Group, LLC ("SFMG") filed this chapter 11 bankruptcy case on May 14, 2015. The Court entered an order converting the case to chapter 7 on March 11, 2016. Philip J. Montoya was appointed the chapter 7 Trustee on March 17, 2016, in which capacity he continues to serve.

The Trustee brought this adversary proceeding on September 9, 2016, seeking avoidance of alleged fraudulent transfers under federal and state law.

SFMG was a healthcare provider, operating primarily in northern New Mexico. Its controlling and managing member was Philip D. Briggs, M.D. Defendant Richard Lieberman, M.D., is a medical doctor in Santa Fe, New Mexico. He worked for more than 20 years at St. Vincent's Hospital in Santa Fe. At different times Lieberman was the hospital's chief of staff and the director of the hospital's emergency services. After experiencing a major cardiac event and subsequent open heart surgery, Lieberman decided to resign from St. Vincent's. He met Briggs in 2003. Briggs asked Lieberman to start an urgent care division of SFMG.

On July 29, 2005, SFMG and Lieberman signed an admission agreement, which:

• Admitted Lieberman as a member of SFMG;
• Obligated Lieberman to manage SFMG's urgent care practice;
• Provided that the urgent care practice would be operated as a separate division;
• Obligated SFMG to pay Lieberman 50% of the net profits of the urgent care division; and
• Required both Lieberman's and Briggs' approval before changing Lieberman's position as the urgent care practice manager or his employment as an urgent care physician.²

Also on July 29, 2005, Lieberman and SFMG signed an Employment Agreement, under which SFMG employed Lieberman at a salary of $86.00 per hour. The agreement authorized

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SFMG to terminate Lieberman's employment for cause, and gave either party the right to terminate the agreement, with or without cause, on 30 days' notice.³

SFMG's urgent care practice was profitable between 2005 and 2013, during which time Lieberman's share of the net profits averaged about one million dollars per year.

On May 17, 2012, Lieberman was arrested in Albuquerque for soliciting a prostitute and possessing cocaine. Newspaper stories were published about the arrest in Albuquerque and Santa Fe. The publicity greatly concerned Briggs, who "locked out" Lieberman from SFMG shortly after the arrest. On September 18, 2012, Briggs sent Lieberman a termination letter, stating that his employment with SFMG would terminate on October 18, 2012. Lieberman was not allowed to work at or for SFMG after being locked out in May 2012.

Lieberman disputed SFMG's/Brigg's right to lock him out and terminate his employment. He demanded that Briggs pay him $750,000 a year for the next ten years, in exchange for Lieberman's membership interest in SFMG. Briggs refused the demand.

On November 21, 2012, SFMG, Briggs, and Lieberman, represented by counsel,⁴ mediated the dispute. The mediation resulted in an agreement in principle, outlined by the mediator in an email to counsel sent the next day. There was significant post-mediation wrangling about some of the terms.⁵ Finally, on April 12, 2013, Briggs, SFMG, and Lieberman signed a Settlement Agreement and Complete Mutual Release, pursuant to which SFMG agreed to pay $1,500,000 to Lieberman, in 60 monthly installments of $25,000. The first installment was due on April 10, 2013.

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The parties released one another from all claims. Further, Lieberman agreed to transfer to Briggs "any and all interest which he may have of whatsoever nature in SFMG and/or Urgent Care Santa Fe."

SFMG paid Lieberman as agreed between April 10, 2010, and the bankruptcy petition date. In total, SFMG paid Lieberman 23 installments of $25,000 (or $575,000).

On his federal income tax returns for 2013, 2014, and 2015, Lieberman took the position that the money he received from SFMG was a return of capital for his "Santa Fe Medical Group Membership Interest."

For some period of time after SFMG locked out Lieberman, SFMG's Urgent Care division continued to be profitable. However, mismanagement, improper billing, excessive distributions to members, and loans to money-losing affiliates caught up with SFMG. By September 30, 2013, SFMG had become insolvent. On May 14, 2015, SFMG's liabilities exceeded its assets by about $2,500,000.

On July 28, 2016, the Trustee's counsel sent a draft of a fraudulent transfer complaint to Lieberman's counsel. This clearly functioned as a demand for repayment of the $575,000.

The Court conducted a two day trial on the merits. The Trustee presented expert reports and expert testimony regarding the value of SFMG's fixed assets, accounts receivable, and other assets and liabilities. Lieberman did not present any of his own evidence about SFMG's financial condition, although his counsel cross-examined the Trustee's expert witnesses.

Attached as Exhibit A to this opinion is a spreadsheet of the Court's findings of fact about the value of SFMG's assets and liabilities each month between January 2013 and May 2015. The basis for the findings is discussed in Section C below, and is incorporated herein by reference.

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Trustee brings a claim under the federal fraudulent transfer statute, § 548(a)(1),⁶ and New Mexico's fraudulent transfer statute, N.M.S.A. § 56-10-14 et seq. The Court's analysis focuses on § 548, rather than the state statute.⁷

A. § 548(a)(1)(B); Constructively Fraudulent Transfers.

Section 548 provides:

(a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily--
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

Section 548(a)(1)(B) permits the Trustee to set aside "so-called constructively fraudulent transfers." BFP v. Resolution Trust. Corp., 511 U.S. 531, 535 (1994). The constructive fraud provision applies to transfers by insolvent debtors. Id. It permits avoidance if the debtor(1) had an interest in property; (2) transferred the interest within two years of the petition date; (3) was

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insolvent when the transfer occurred or became insolvent as a result thereof; and (4) received less than reasonably equivalent value in exchange for the transfer. Id. See also Weinman v. Walker (In re Adam Aircraft Indus.), 805 F.3d 888, 897 (10^th Cir. 2015) (transfer is avoidable if, on the date of the transfer, the debtor did not receive reasonably equivalent value and was insolvent).

B. § 548 (a)(1)(B)(i)--Reasonably Equivalent Value.

Value means "property, or satisfaction or securing of a present or antecedent debt of the debtor." § 548(d)(2)(A). The Supreme Court has "counseled that § 548's 'reasonably equivalent value' inquiry asks 'whether the debtor has received value that is substantially comparable to the worth of the transferred property.'" Adam Aircraft, 805 F.3d at 897-98 citing BFP, 511 U.S. at 548. In this context, "reasonably equivalent" means approximately or roughly equivalent. Id. quoting BFP, 511 U.S. at 538 n. 4.

Here, the question is what SFMG received in exchange for its $25,000 monthly payments. Briggs, rather than SFMG, received Lieberman's interest in SFMG. Logically, Briggs should have paid for the interest, not SFMG. As confirmed by Lieberman's federal income tax returns, the real value in the settlement was received by Briggs (Lieberman's membership interest) and Lieberman (the cash payments). SFMG got little but the burden of paying Lieberman so Briggs could obtain Lieberman's SFMG membership interest.

It is true that Lieberman released all of his claims against SFMG. The claims, which were for 50% of the urgent care division's future net profits, likely had value. Had SFMG been released from its obligation to pay those future net profits, such a release could well have constituted reasonably equivalent value. As it was, however, SFMG's obligation was...