Paloian v. Lasalle Bank, N.A.

619 F.3d 688 (7th Cir. 2010)

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Nature of the Case

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Facts

Between 1992 and 2000 Doctors Hospital was a Subchapter S corporation controlled by James Desnick, an ophthalmologist. In 1999 and 2000 Desnick paid civil penalties of some $18.5 million to the Medicare and Medicaid programs on account of the Hospital's excessive bills--not only 'upcoding' to put services in categories that led to greater reimbursement, but also claims for medically unnecessary procedures or work never done at all. Patient stays were significantly longer than the national average. Doctors Hospital closed its doors in 2000. In March 1997 Daiwa Healthco extended a revolving $25 million line of credit to MMA Funding, L.L.C., which made the money available to the Hospital for operating expenses. Desnick owned 99% or more of MMA Funding. The Hospital transferred all of its current and future accounts receivable to MMA Funding, which gave Daiwa a security interest in them. The plan of this transaction was to use MMA Funding as a 'bankruptcy-remote vehicle' so that Daiwa could be assured of repayment even if the Hospital entered bankruptcy. In August 1997 Nomura Asset Capital Corporation loaned $50 million to the Hospital through HPCH LLC, which owned the Hospital's building and land. As part of this transaction, the Hospital promised to pay HPCH additional rent. HPCH gave Nomura a security interest in the incremental rent, which was to be transferred to MMA Funding. The Daiwa line of credit lasted through March 2000. The Hospital filed for bankruptcy. The Nomura loan was securitized before the end of 1997. It was sold to a third party that packaged several billion dollars of commercial credit for resale to investors. The assets were transferred to a trust, of which LaSalle National Bank is the trustee and Orix Capital Markets the servicer. Nomura was reimbursed and has no stake in the current dispute. The bankruptcy judge concluded that the Hospital was insolvent no later than August 1997 and that the increased rental rate for the lease of the building and grounds was in reality debt service by the Hospital. The judge concluded that the repayments on the Nomura loan were fraudulent conveyances, which must be returned to the estate. As of July 1998, when the Hospital and its affiliates finally started using the precise cash-routing instructions in the loan agreements by sending the lease payments directly to D, the payments were being made with MMA Funding's assets rather than the Hospital's and thus could not be avoided in the bankruptcy. The judge concluded that all payments from July 1998 forward are outside the bankruptcy. P accepts this conclusion with respect to repayments on the Daiwa loan but not with respect to repayments on the Nomura loan. The district judge affirmed. D's argument on appeal is that it is not an 'initial transferee' of the funds, for the purpose of § 550(a)(1). D contends that it was simply a conduit for placing the money in the trust.