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In re KMC Real Estate Investors, LLC

United States District Court, S.D. Indiana, New Albany Division

May 8, 2015

KMC REAL ESTATE INVESTORS, LLC, et al., Appellees. KENTUCKIANA MEDICAL CENTER, LLC Debtor - Consolidated Party re 4:13-cv-181-SEB-WGH, In Re: KMC REAL ESTATE INVESTORS, LLC Debtor, In Re: KENTUCKIANA MEDICAL CENTER, LLC Debtor - Consolidated Party re 4:13-cv-181-SEB-WGH, ABDUL G. BURIDI, Appellant, NANCY J. GARGULA U.S. Trustee, Trustee

For In Re: KMC REAL ESTATE INVESTORS, LLC, Debtor, Courtney E. Chilcote, TUCKER, HESTER, BAKER & KREBS, Indianapolis, IN.

For ABDUL G. BURIDI, Appellant: Miles S. Apple, PITT & FRANK PSC, Louisville, KY.

For KMC REAL ESTATE INVESTORS, LLC, Appellee: Bradley J. Buchheit, Courtney E. Chilcote, David Ralph Krebs, TUCKER HESTER BAKER & KREBS, LLC, Indianapolis, IN.

For KENTUCKIANA MEDICAL CENTER, LLC, Consolidated Party re 4:13-cv-181-SEB-WGH, Appellee: David Marcus Cantor, Neil C. Bordy, Tyler R. Yeager, SEILLER WATERMAN LLC, Louisville, KY.

For NANCY J. GARGULA, U.S. Trustee, Trustee: Laura A. DuVall, OFFICE OF THE U.S. TRUSTEE, Indianapolis, IN.


SARAH EVANS BARKER, United States District Judge.

Appellant Abdul G. Buridi appeals the Bankruptcy Court's approval of the final confirmation orders entered in the chapter 11 cases of debtors KMC Real Estate Investors, LLC (" KMC" ) and its affiliate Kentuckiana Medical Center, LLC (" Kentuckiana" ). For the following reasons, the Bankruptcy Court's approval of the confirmation orders is AFFIRMED.

Factual Background

General Background

Between 2005 and 2007, Cardiovascular Hospitals of America, LLC (" CHA" ) and Kentuckiana Investors, LLC (" KI" ) formed KMC to develop and operate a new hospital facility in Clarksville, Indiana. CHA and KI each owned 49% of KMC and the membership interests of KI were held by approximately thirty (30) physicians who practiced in the greater Louisville, Kentucky, area, including Dr. Buridi. In order to obtain financing for the KMC project, CHA, KI, and the physician-members of KI guaranteed various loans and other financial obligations of KMC to lenders and equipment providers. Unfortunately, KMC immediately encountered financial difficulties when its construction loan proceeds and working capital were exhausted before the hospital was completed and stabilized.

Concurrently with the formation of KMC, many of the physician-members of KI invested in and acquired membership interests in KMCREI, which purchased the real estate and financed construction of the hospital facility through a $21 million loan from Branch Banking & Trust Company (" BB& T" ). There was no requirement that the physician-members of KI acquire membership interests in KMCREI, however. KMCREI's membership interests were divided proportionately, not equally, among the physicians who did choose to invest. Dr. Buridi owned a 1.03% membership interest in KI and a 1.65% membership interest in KMCREI. As owner of the hospital building, KMCREI depended entirely on its sole tenant, KMC, for its revenues, and therefore when KMC encountered financial issues, KMCREI also suffered.

Chapter 11 Filings

On September 19, 2010, KMC filed its voluntary petition for relief under chapter 11 of the Bankruptcy Code and KMCREI similarly filed under chapter 11 on April 1, 2011. Although both debtors continued to lose significant amounts of money after their bankruptcy cases were filed, they managed to reach tenuous agreements with several key creditors that enabled them to continue operating.

From the outset of KMC's bankruptcy, it became clear that the only way in which the hospital could become financially viable would be through a cash infusion of millions of dollars to complete construction of the hospital and purchase required equipment. In June 2012, KMC and KMCREI each obtained confirmation of their respective plans of reorganization but were unable to consummate the plans when their investor refused to fund the reorganization. Instead, both debtors remained in Bankruptcy Court and continued to solicit new investments while continuing to accrue substantial post-petition liabilities through normal business operations. By June 2013, KMC and KMCREI carried a combined debt load of more than $31 million in secured claims, $6 million in post-petition administrative claims, and $5 million in unsecured claims.

The Confirmed Plans of Reorganization

Prior to commencement of KMCREI's chapter 11 case, RL BB Financial, LLC (" RLBB" )[1] acquired the KMCREI construction loan originally advanced by BB& T. After KMC's and KMCREI's failures to consummate their original plans of reorganization, they engaged in extensive negotiations with RLBB in the months prior to June 2013 to develop the framework for each debtor's Third Amended Plan of Reorganization. The KMC Plan called for RLBB or its affiliate, as " Exit Investor," to provide approximately $10 million to complete the hospital and pay claims against KMC. The KMCREI Plan provided for the restructuring of RLBB's $20 million secured loan and cash payments to satisfy past due real estate taxes.

Under the KMC Plan, KMC's secured liabilities were significantly restructured, holders of administrative claims received 20% of their claims in cash and notes payable over five years, and holders of unsecured claims received cash payments equal to their pro rata share of a $500,000 pool of funds, in most cases equal to a fraction of their overall indebtedness. All pre-confirmation equity membership interests in KMC were cancelled on the effective date of the KMC Plan, and the Exit Investor acquired 100% of the new membership interests in KMC.

Under the KMCREI Plan, only the secured claims owed to RLBB and the real estate tax lienholder were to be satisfied through distribution of money or property. All unsecured claims against KMCREI were to be discharged pursuant to 11 U.S.C. § 1141(d), and all membership interests in KMCREI were cancelled. The KMCREI Plan originally provided that 80% of the new membership interests in reorganized KMCREI would be issued to the Exit Investor while the remaining 20% of the new membership interests were to be issued to Drs. Christodulos Stavens, Eli Hallal, Jeffrey Campbell, and Renato LaRocca, four of the physician-owners of KI " in consideration of their ongoing commitment to the hospital and importance to the feasibility of [the KMCREI Plan] and the KMC Plan." Dkt. No. 2 at 8. These four physicians comprised the KI contingent on KMC's board of managers (the remaining board members consisted of representatives of CHA). Dr. Stavens served as KMC's Chief Executive Officer as well as the manager of KI. These four physicians were also responsible for admitting 70-80% of all patients to the hospital during the time period relevant to this litigation.[2]

Drs. Stavens, Hallal, and Campbell asserted Allowed Administrative Claims pursuant to 11 U.S.C. § 503(b)(1)(A) for salary and on-call services earned but not paid during the KMC bankruptcy case. Dr. LaRocca acquired an Allowed Secured Claim against KMC by assignment, which enabled KMC to retain operating room and anesthesiology equipment for its continued operations during the bankruptcy case. According to KMC, the 20% distribution of KMCREI's equity interests was in consideration of the four physicians' compromise of their respective Allowed Administrative Claims against KMC.

As described below, however, the Bankruptcy Court ultimately ordered that the 20% that was to go to Drs. Stavens, Hallal, Campbell, and LaRocca could not be transferred if that transfer would violate applicable federal healthcare laws. In that case, RLBB would hold 100% of the new equity in the reorganized KMCREI following confirmation of the plan.

Appellant's Objections to Confirmation

On July 26, 2013, Dr. Buridi, among others, filed objections to confirmation of the KMC and KMCREI Plans (" the Plan Objections" ). The Plan Objections raised four arguments in opposition to confirmation of the plans: (1) that the proposed distribution of 20% of the equity interests in KMCREI to Drs. Stavens, Hallal, Campbell, and LaRocca violated 11 U.S.C. § 1129(b)(2)(B)(ii), the so-called " absolute priority rule" ; (2) that the plans unfairly discriminated against Dr. Buridi's subrogation claim arising from amounts collected pursuant to his personal guaranty; (3) that the KMC Plan was filed in bad faith because a secured creditor of KMC with personal guaranties filed a collection suit against Dr. Buridi and several other doctors; and (4) that the plan did not satisfy 11 U.S.C. § 1129(a)(11) because it was likely to be followed by liquidation or further financial reorganization.

Amendment to KMC Plan

The proposed KMC Plan included an injunction intended to prevent creditors from pursuing claims against KMC and its property or any guarantor or co-obligor of KMC and their property. As a personal guarantor, Dr. Buridi falls within the injunction's protection. At the hearing on the disclosure statement, Dr. Buridi had requested clarification about the injunction and its effect on two state court cases he had filed against third-party non-debtors, including Drs. Stavens and Hallal. At that hearing, KMC's counsel stated that the injunction was unrelated to Dr. Buridi's state court claims and would not prevent him from pursuing those lawsuits. With this assurance, Dr. Buridi did not pursue his objection of the original injunction.

On July 29, 2013, the day before the Confirmation Hearing was scheduled to occur, KMC filed an amendment to the KMC Plan that altered the injunction. Specifically, the following ...

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