Miko Enters. v. Allegan Nursing Home, LLC - No. 1:09-CV-988, 2010 U.S. Dist. LEXIS 2043 (W.D. Mich. Jan. 12, 2010)

Rule:

Pursuant to M.C.L. § 600.6104, a court may take various actions to allow a party to enforce a judgment, including compelling discovery of property or other things belonging to a judgment debtor; preventing the transfer of any property or money; and appointing a receiver. The act also provides a procedure for resolving disputes concerning interests in property claimed by a debtor or a third party.

Facts:

Plaintiff, Allegan Real Estate, LLC, and Defendant, Allegan Nursing Home, LLC, are separate legal entities. No party has asserted otherwise. Prior to September 2008, Allegan Real Estate and Allegan Nursing Home were both owned by Piersma. Allegan Real Estate is the former owner of real and personal property located at 1200 Ely Street, Allegan, Michigan (the "Property"). The Property consists of a 123-bed residential care facility or nursing home, together with various personal property used to operate the nursing home. In 1993, Allegan Nursing Home acquired from the then-operator of the nursing home certain assets required to run the facility, including a license from the State of Michigan; Certificates of Need; and (3) Provider Agreements under Medicaid and Medicare. Thus, while Allegan Real Estate owned the real and personal property used in the operation of the nursing home, Allegan Nursing Home actually operated the nursing home facility. In March 2000, Allegan Real Estate sought to refinance its existing mortgage loan on the Property. Capital Funding Group, Inc. agreed to refinance the loan, and the loan was to be insured by the United States Department of Housing and Urban Development ("HUD") under its Section 232 program. In connection with the refinancing transaction, a Security Agreement between Allegan Real Estate and Capital Funding covering the personal property, including the accounts receivable, of Allegan Real Estate was executed, among others. The Security Agreement on the personal property provided that the "collateral does not include anything which is not owned by Debtor (Allegan Real Estate)." Allegan Nursing Home was not a party to these documents and nothing gave Capital Funding Group a security interest in the receivables of Allegan Nursing Home. At the same time the refinancing documents were signed, Allegan Real Estate and Allegan Nursing Home entered into a Lease authorizing Allegan Nursing Home to "occupy and use the Project for the operation of a nursing home and for no other purpose." Pursuant to the Lease, Allegan Nursing Home agreed to make monthly rent payments in an amount sufficient to cover the mortgage. In addition, the Lease granted a first priority security interest to Allegan Real Estate in Allegan Nursing Home's license, Provider Agreements, and Certificates of Need (the "Certification Collateral"). However, the provision creating the security interest specifically provided that Allegan Real Estate "shall have no security or other interest in any accounts receivable of Lessee with respect to the Project." In accordance with the Lease, the Security Agreement between Allegan Real Estate and Capital Funding Group covered Allegan Real Estate's interests in the Certification Collateral. Capital Funding Group filed a UCC financing statement against Allegan Nursing Home, covering the Certification Collateral. The financing statement specifically provided that the collateral "does NOT include the accounts receivables of Debtor." Finally, as part of this component of the transaction, Allegan Real Estate entered into a Subordination Agreement with Heller Healthcare Finance, Inc. ("Heller"). At the time the Lease was signed, Allegan Nursing Home had a preexisting loan with Heller, and Heller held a first priority security interest in Allegan Nursing Home's accounts receivable and the Certification Collateral. In order to allow Allegan Real Estate to acquire a first priority security interest in the Certification Collateral pursuant to the Lease and, by extension, to permit Capital Funding Group to acquire a first priority security interest in the Certification Collateral through Allegan Real Estate, Heller agreed to subordinate its lien in the Certification Collateral, but not Allegan Nursing Home's accounts receivable. In addition to the financing documents mentioned, Allegan Real Estate and Allegan Nursing Home were each required to execute a separate Regulatory Agreement with HUD. Allegan Real Estate's Regulatory Agreement contains certain limitations on the transfer or encumbrance of assets by Allegan Real Estate. Allegan Nursing Home's Regulatory Agreement lacks similar restrictions, although it does incorporate the Lease between Allegan Real Estate and Allegan Nursing Home. Prior to the refinancing, Allegan Nursing Home's counsel, Andrew Hakken, requested a waiver from HUD of the requirement that Allegan Nursing Home grant a security interest in its receivables to any party involved in the refinancing. On March 29, 2000, Patricia Russie, the Operation Officer in HUD's Detroit office, issued a letter on behalf of the Housing Director for the Detroit office, Robert Brown, to Mr. Hakken, copied to Capital Funding Group, stating that such a request would not have an adverse effect upon the security of the mortgage. From time-to-time, Piersma made operating loans to Allegan Nursing Home. On November 20, 2006, Piersma loaned Allegan Nursing Home $ 850,000, which was evidenced by a promissory note (the "Note") in favor of the Trust. In addition to the Note, the Trust and Allegan Nursing Home entered into a security agreement to secure the indebtedness covered by the Note. The security agreement granted the Trust a security interest in "all accounts, contract rights, chattel paper, instruments, general intangibles, and letter of credit rights, wherever located, whether now owned or hereafter acquired by Debtor." The Trust perfected its security interest by filing a financing statement covering the accounts receivable of Allegan Nursing Home.

In August of 2008, Piersma and others entered into negotiations to sell Allegan Nursing Home. On September 25, 2008, Piersma and others sold 100% of their membership interests in Allegan Nursing Home to Rhema Holdings One, Inc. Following the sale, Allegan Nursing Home remained indebted to Piersma under the Note. In or about January 2009, Allegan Real Estate entered into negotiations with Ely Street Holdings, a wholly-owned subsidiary of Capital Funding Group, for the sale of Allegan Real Estate's real and personal property. The sale occurred on January 9, 2009. The deed conveying the Property to Ely Street Holdings was made subject to Capital Funding Group's mortgage and the Regulatory Agreements. HUD was aware of this transaction and gave its approval. On February 1, 2009, Allegan Nursing Home entered into a new lease with Ely Street Holdings. As with the 2000 Lease between Allegan Real Estate and Allegan Nursing Home, the new lease created a security interest in the Certification Collateral, but it did not create a security interest in Allegan Nursing Homes's receivables. After Piersma and others sold Allegan Nursing Home to Rhema Holdings, the new owners failed to pay Piersma under the Note. Plaintiffs, MIKO Enterprises, Inc., Piersma, and Allegan Real Estate, filed a three-count complaint in the Allegan County Circuit Court against Allegan Nursing Home. Plaintiffs sought to recover $ 765,119.17 that remains due under the Note. On October 13, 2009, the state court granted Piersma's motion for summary disposition on his claim under the Note and entered judgment in favor of Piersma in the amount of $ 934,836.09, which included $ 765,119.17 plus accrued interest in the amount of $ 169,716.92. In their complaints in intervention, Capital Funding Group and Ely Street Holdings, and the United States, sought a declaratory judgment that they have a first priority security interest in the accounts in which Piersma claims a security interest. Piersma has now moved to enforce his security interest in Allegan Nursing Home's accounts. 

Issue:

Do the Capital Funding Group and HUD have a lien in Allegan Nursing Home’s receivables?

Answer:

No.

Conclusion:

The documents from the 2000 refinancing transaction show that the receivables of Allegan Nursing Home were not part of the collateral to secure the loan to Allegan Real Estate and do not establish a prior security interest. As set forth above, the loan was made to Allegan Real Estate, and Allegan Real Estate executed a Mortgage Note, a Mortgage, and a Security Agreement, all in favor of Capital Funding Group. In connection with the 2000 refinancing transaction, Allegan Real Estate and Allegan Nursing Home entered into a Lease whereby Allegan Real Estate leased to Allegan Nursing Home the real and personal property owned by Allegan Real Estate in order to permit Allegan Nursing Home to operate a nursing home. The Lease was approved by HUD as part of the transaction. In order to ensure that HUD and Capital Funding Group would have control over the assets necessary to operate the nursing home -- the Certification Collateral -- the Lease created a first priority security interest in favor of Allegan Real Estate (thereby giving Allegan Real Estate rights in the collateral for purposes of Capital Funding Group's security interest) in Allegan Nursing Home's license, Provider Agreements, and Certificates of Need. Notably, the Lease expressly stated that Allegan Real Estate had "no security or other interest in any accounts receivable of [Allegan Nursing Home] with respect to the Project." Consistent with the exclusion of receivables from the security interest granted to Allegan Real Estate, the financing statement filed by Capital Funding Group with respect to the assets of Allegan Nursing Home covered the Certification Collateral but expressly confirmed that "[s]uch collateral does NOT include the accounts receivables of Debtor." Finally, the Subordination Agreement between Allegan Real Estate and Heller further demonstrates that Intervenors hold a first priority security interest only in the Certification Collateral and not the receivables of Allegan Nursing Home. As the United States acknowledges in its brief, Capital Funding Group acquired a first priority lien in the Certification Collateral only because Heller subordinated its interest in those assets to Allegan Real Estate. Because none of the financing documents contemplate that Capital Funding Group would receive a lien in Allegan Nursing Home's receivables, there was no need for Heller to subordinate its interest in those assets to Allegan Real Estate or any other party.