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In re Fundamental Long Term Care, Inc.

United States Court of Appeals, Eleventh Circuit

October 19, 2017

IN RE: FUNDAMENTAL LONG TERM CARE, INC., Debtor.
v.
RUBIN SCHRON, Defendant-Appellee. ESTATE OF JUANITA JACKSON, ESTATE OF ELVIRA NUNZIATA, ESTATE OF JOSEPH WEBB, ESTATE OF ARLENE TOWNSEND, STATE OF OPAL LEE SASSER, ESTATE OF JAMES HENRY JONES, Plaintiffs-Appellants, BETH ANN SCHARRER, Plaintiff,

         Appeal from the United States District Court for the Middle District of Florida D.C. Docket Nos. 8:16-cv-00022-EAK & 8:11-bkc-22258-MGW

          Before JORDAN and JULIE CARNES, Circuit Judges, and VINSON, [*] District Judge.

          JULIE CARNES, Circuit Judge.

         This case has a complex procedural history lasting more than a decade and spanning several state and federal venues. It began when the estates of several deceased nursing-home patients (the "Estates" or "Appellants") brought a series of wrongful-death suits against a network of nursing homes. These suits collectively resulted in $1 billion in empty-chair judgments against the network. In an effort to evade enforcement of these and other liabilities, the defendant entities orchestrated a so-called "bust out" scheme under which they transferred the useful assets of the nursing-home business into a newly formed operating entity, leaving the core judgment debtor a judgment-proof shell company.

         When the Estates learned that this judgment debtor had been stripped of its assets, they filed an involuntary Chapter Seven bankruptcy petition in the Middle District of Florida and initiated an adversary proceeding seeking to avoid, as fraudulent, the transfer of the debtor's assets. The complaint named seventeen entities and individuals as defendants and described a wide-reaching scheme in which assets were secretly diverted in order to hinder, delay, and defraud the debtor's various judgment creditors. One of the named defendants was real-estate investor Rubin Schron.

         After careful consideration of the Estates' thirty-two claims for relief-and after granting the Estates an opportunity to comprehensively amend their lengthy and deficient initial complaint-the bankruptcy court dismissed Schron from the suit, concluding that his alleged connection with the transaction was speculative at best. Claims against several additional defendants survived dismissal, and the case culminated in a twelve-day bench trial. At its conclusion, the Estates settled with the remaining defendants for $24 million. The bankruptcy court approved the settlement as fair and equitable on the condition that the Estates be permanently enjoined from pursuing any additional claims arising from the bust-out scheme against Schron individually.

         The Estates appealed the dismissal of claims against Schron and the bankruptcy court's issuance of a permanent injunction with respect to Schron. The district court for the Middle District of Florida affirmed both orders. The Estates now appeal those orders to this Court. After careful review, and with the benefit of oral argument, we affirm.

         BACKGROUND

         Although this appeal relates solely to the Estates' claims against Appellee Rubin Schron, the scope of the allegations against him requires us to review in some detail the underlying transaction and the course of proceedings before the bankruptcy court.[1]

         I. The March 2006 Transaction

         Trans Healthcare, Inc. ("THI") was founded in 1998 to operate nursing homes, assisted living facilities, and long-term acute-care hospitals throughout the United States. Trans Healthcare Management, Inc. ("THMI") was a wholly owned subsidiary of THI and provided management services to THI until March 2006. By early 2006, numerous wrongful-death and negligence actions had been filed against THI and THMI on behalf of several nursing-home patients who had died while in THI and THMI's care.

         Anticipating adverse judgments, the entities designed a transaction that would shield their assets from potential creditors without affecting their profitable operations (the "2006 Transaction"). Under the direction of Leonard Grunstein, a former real-estate lawyer, and Murray Forman, an investment banker, two new entities were created: Fundamental Long Term Care, Inc. ("FLTCI") and Fundamental Long Term Care Holdings ("FLTCH") (together, the "Fundamental Entities"). In the first phase of the transaction, THMI sold all its assets to FLTCH for $9.9 million. In the second phase, THI sold all its stock in the stripped-down THMI to FLTCI. FLTCI therefore acquired all of THMI's liabilities but none of its assets.

         THI remained an active corporation and continued operating nursing homes on a small scale following the transaction. It was ultimately placed into a receivership and wound down. THMI continued to exist as an insolvent subsidiary and the sole asset of FLTCI; both entities quickly became defunct. FLTCH, on the other hand, was left with a substantial number of productive assets and continued operating the entities' broader network of nursing homes, generating millions of dollars of income, without being saddled with the millions of dollars in liabilities attributable to those entities. To keep the network running, FLTCH rebranded the former THI/THMI facilities and created two new subsidiaries: FCC, which provided operational and clinical support; and FAS, the administrative arm of the company. Together, FLTCH, FCC, and FAS continued to operate in the same locations, and used the same employees and equipment, as did THI and THMI prior to the 2006 Transaction. At all relevant times, FLTCH was owned by Grunstein and Forman.[2]

         As noted, the Estates' complaint made allegations concerning Rubin Schron's involvement in the above-described 2006 Transaction. Schron is a wealthy New York real-estate investor whose involvement with the THI network began in 2002. That year, Grunstein and Forman-Schron's lawyer and banker, respectively-allegedly convinced Schron to fund the acquisition of 120 nursing homes from an unrelated entity that was in the process of Chapter Eleven liquidation. The acquisitions were executed by an entity called ABE Briarwood, and the facilities were subsequently leased to THI. The complaint does not allege that Schron ever held a direct ownership interest in THI, THMI, or FLTCH. Similarly, there is no allegation that Schron was involved in designing or executing the 2006 Transaction. The Estates allege only that Schron was aware of Grunstein and Forman's involvement in the 2006 Transaction and that Grunstein and Forman acquired stakes in FLTCH as Schron's agents, but as to this last allegation, the Estates articulate no basis for their conclusory assertion of an agency relationship.

         II. The Wrongful-Death Judgments

         In the meantime, the estates of six deceased nursing-home patients pursued wrongful-death actions against THI and THMI in state court, alleging that the decedent patients had been abused, neglected, and injured by the negligent and reckless operation of THI's nursing homes in Florida and Pennsylvania. The Estates had no knowledge at the time that the named defendants, THI and THMI, had been stripped of their assets.

         To ensure that the Estates were kept in the dark, FLTCH's goal was to use the THI receivership to conceal the linked transfers long enough for the statute of limitations to run on any available fraudulent-transfer claims. In furtherance of this plan, THI directed its counsel to withdraw representation of THI and THMI at around the same time as the relevant statutes of limitations ran. The liability proceedings moved forward, and the various state courts in which these claims were pending ultimately entered "empty-chair" jury verdicts (that is, verdicts not contested by the defendants) against THI and THMI totaling more than $1 billion.

         Despite FLTCH's efforts at concealment, the Estates eventually learned of the 2006 Transaction and the formation of the successor Fundamental Entities. They responded by initiating supplementary state-court proceedings against various entities and individuals alleged to have fraudulently transferred the FLTCH assets out of creditors' reach. THI, THMI, the Fundamental Entities, Grunstein, Forman, and Schron were specifically targeted. The Estates also initiated an involuntary Chapter Seven bankruptcy proceeding, naming FLTCI as debtor. A Trustee was appointed, and the Estates were identified as FLTCI's chief creditors.

         Shortly after the Chapter Seven proceeding began, the Trustee expressed her intent to pursue fraudulent-transfer and related actions under the Bankruptcy Code against FLTCH and other entities involved in the 2006 Transaction. This cause of action overlapped with the Estates' already ongoing judgment-enforcement actions, which were based primarily on state-law fraudulent-transfer theories. In order to fend off these simultaneous actions, FLTCH filed a declaratory-judgment action in a New York court seeking a declaration that any fraudulent-transfer or similar claims relating to the 2006 Transaction were barred by the statute of limitations. The bankruptcy court enjoined the declaratory-judgment action after concluding that it would impermissibly interfere with the Trustee's ability to administer the Chapter Seven proceeding and protect the assets of the estate.

         Having lost its bid for a New York declaratory judgment, FLTCH then sought an order from the bankruptcy court temporarily enjoining the Estates from pursuing their state-court judgment-enforcement actions. The bankruptcy court agreed that a multiplicity of parallel actions could lead to inconsistent outcomes and therefore entered an order establishing that all fraudulent-transfer and similar claims against the various defendants designed to unwind the 2006 Transaction would be litigated in a single adversary proceeding before the bankruptcy court (the "Venue Order"). The result was that all pending state actions were enjoined pending resolution of the Chapter Seven adversary proceeding.

         III. The Adversary Proceeding

         Following the bankruptcy court's Venue Order, the Estates initiated an adversary proceeding with a two-count complaint for declaratory judgment, naming THI, THMI, the Fundamental Entities, Grunstein, Forman, and Schron as defendants (collectively, the "Defendants"), in addition to several other entities involved in the transaction. In Count I, the Estates sought a declaration that FLTCH and FLTCI were liable for the judgments against THI and THMI under a successor theory of liability. In Count II, they sought a declaration that Defendants were directly liable for the judgments against THI and THMI under a veil-piercing theory. The Trustee intervened in that proceeding to add a count for substantive consolidation of FLTCI and THMI. The Estates and the Trustee were later granted leave to amend the initial complaint and join their respective claims.

         A. First Amended Complaint

         In December 2013, the Estates and Trustee (together, "Plaintiffs") filed an enhanced First Amended Complaint-a 228-page tome containing 1, 201 numbered paragraphs and twenty-two counts against Defendants and several additional entities. The twenty-two counts in the complaint can be broken into eight substantive claims for relief: one count for substantive consolidation of FLTCI and THMI; two counts for breach of fiduciary duty; four counts for aiding and abetting a breach of fiduciary duty; one count for successor liability; two counts for piercing of the corporate veil; three counts for alter-ego liability; eight counts for actual and constructive fraudulent transfer; and one count for conspiracy to commit a fraudulent transfer. Asserting theories of direct or derivative liability, Plaintiffs' goal was to "unwind" the 2006 Transactions and recapture the FLTCH assets- wherever they may be held-in order to satisfy the Estates' various judgments against the THI/THMI network.

         Defendants moved to dismiss all but the substantive-consolidation count. In a thorough opinion, the bankruptcy court upheld several counts against several defendants and dismissed several without prejudice, granting leave to amend. See Estate of Jackson v. Gen. Elec. Capital Corp. (In re Fundamental Long Term Care, Inc.), 507 B.R. 359, 386 (Bankr. M.D. Fla. 2014). Specifically, the court allowed the claims for fraudulent transfer against FLTCH, Forman, and Grunstein to go forward, declining to enforce the statute of limitations on those claims in light of allegations that these defendants had intentionally concealed facts that would have given rise to the claim within the limitations period. As to the remaining claims, the bankruptcy court found the allegations "confusing, ambiguous, generalized, [and] conclusory, " and noted overall that the pleading required "considerable energy to read." Id. at 385-86 (internal quotation marks omitted). The court was nonetheless "not ready to conclude that the Plaintiffs could not allege additional facts that may potentially give rise to the causes of action the Court is dismissing." Id. at 386. The court instructed Plaintiffs to amend again and cure the pleading defects. Id.

         B. Second Amended Complaint

         Plaintiffs filed their Second Amended Complaint in April 2014. Instead of clarifying their initial slate of allegations and rehabilitating the dismissed claims, as they were directed to do, the Second Amended Complaint incorporated several hundred paragraphs of the First Amended Complaint by reference and offered a new, but largely repetitive, restatement of several claims. It then added four brand-new claims against several defendants. With only two exceptions, the bankruptcy court dismissed with prejudice each of the newly pled and re-pled claims, citing the same defects identified in the first motion to dismiss.

         The court concluded that it was appropriate to dismiss the failed claims with prejudice because "any further attempts by Plaintiffs to amend their complaint would be futile or unfairly prejudicial to the Defendants." On that point, the court observed that, as a result of the parallel judgment-enforcement actions the Estates had already pursued in various state courts, Plaintiffs "had the benefit of almost complete discovery before filing their second amended complaint."

         Most relevant to this appeal are the court's conclusions as to the claims against Schron. Plaintiffs attempted in their Second Amended Complaint to revive each of their original counts against Schron and to add four more: alter-ego liability; aiding and abetting a breach of fiduciary duty; abuse of process; conspiracy to commit abuse of process; negligence; constructive fraud; and improper post-petition transfer. The court dismissed each claim in turn, emphasizing the overarching flaw in the Plaintiffs' narrative: "[N]owhere in the complaint . . . is Schron alleged to have committed any act individually, " nor did the allegations support a theory of derivative liability against Schron.

         The court followed its decision with a final judgment in favor of Schron (the "Dismissal"), in which it stated that "[f]inal judgment is entered in favor of Schron on all claims that were or could have been asserted by Plaintiffs against him in the amended complaint and the second amended complaint."

         C. Subsequent Proceedings

         Schron was the only defendant fully dismissed from the adversary proceeding at the pleading stage. Three additional defendants were dismissed later via their motions for summary judgment. In the course of pre-trial proceedings, the bankruptcy court also granted Plaintiffs' motion to substantively consolidate THMI with the Chapter Seven debtor, FLTCI. The bankruptcy court then proceeded to consider the surviving claims during a twelve-day bench trial. At issue in the bench trial were claims against Grunstein, Forman, and several related entities for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, successor liability, fraudulent transfer, and conspiracy to commit fraudulent transfer.

         At the conclusion of trial, the bankruptcy court dismissed claims against three additional defendants but remained "unsure" as to "which of the Defendants on the buyers' side [of the 2006 Transaction] would be liable" under a successor liability theory, which was the only remaining theory under which Plaintiffs could prevail. The court announced findings of fact and conclusions of law following trial and then ordered Plaintiffs and the remaining defendants, including FLTCH, Forman, and Grunstein, to mediate in hopes that a settlement could be reached.

         Mediation was successful and ultimately yielded five settlement agreements. Under these agreements, Plaintiffs agreed to accept $18.5 million from FLTCH, FAS, THI, Forman, and Grunstein; $1.25 million from one of the law firms that defended THI and THMI against the Estates' earlier actions; $3.25 million from three additional entities involved in the 2006 Transaction; and $700, 000 from THI's state-court receiver. In total, these agreements yielded $23.7 million to cover Plaintiffs' damages.

         Having earlier been dismissed from the adversary proceeding at the pleading stage, Schron was the sole non-settling Defendant. Throughout the adversary proceeding, the Estates had maintained their intention to pursue further state actions against Schron notwithstanding his early dismissal from the case. Schron recognized the possibility of future action against him in a different venue and accordingly opposed the various settlements unless they were accompanied by a permanent injunction preventing the Estates from reviving or bringing any new state-court judgment-enforcement actions against him. Thus, Schron's insistence on a permanent injunction reflected his legitimate fear that Plaintiffs would try to upend the resolution reached by the bankruptcy court after much litigation by the parties.

         Likewise concerned that Plaintiffs would attempt to undo the final resolution that had been the goal of the complex and protracted adversary proceeding, the bankruptcy court issued a permanent injunction (the "Permanent Injunction" or "Injunction") prohibiting Plaintiffs from "pursuing claims against Rubin Schron arising out of the nucleus of facts set forth in the adversary complaint in this proceeding." This injunction was integral to and a condition of the court's approval of the settlements, as the court determined that a settlement of the surviving claims could not be "fair and equitable" if it did not also finally resolve the claims against Schron. In the bankruptcy court's view, an injunction prohibiting further litigation against Schron in another forum was "necessary" to protect the court's prior judgment as to Schron. The court granted this permanent injunction in December 2015 and then, after approving each of the settlement agreements, issued an opinion thoroughly discussing the basis for the Injunction and the authority on which it was issued.

         The Estates appealed the Dismissal and the Permanent Injunction as to Schron to the Middle District of Florida, which affirmed both orders of the bankruptcy court. The Estates now appeal the district court's affirmance, asking this Court to reverse the bankruptcy court's orders with respect to Schron.

         STANDARD OF REVIEW

         In a bankruptcy appeal, this Court functions as a second reviewer of the bankruptcy court's rulings and applies the same standards as the district court, which operates as the first level of appellate review. Brown v. Gore (In re Brown), 742 F.3d 1309, 1315 (11th Cir. 2014). We therefore review a lower court's dismissal of a pleading for failure to state a claim de novo, accepting factual allegations as true and construing them in the light most favorable to the plaintiff. Almanza v. United Airlines, Inc., 851 F.3d 1060, 1066 (11th Cir. 2017). A lower court's decision to issue an injunction under the All Writs Act, 28 U.S.C. § 1651(a), is also reviewed de novo. SFM Holdings, Ltd. v. Banc of Am. Secs., LLC, 764 ...


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