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Full title: Objection of the Noteholder Claimants to Motion of Debtors to Quash Notices of Deposition and Production Requests (related document(s), ) Filed by DLF No. 3, LLC, JJT No. 1, LLC, REIT Solutions II, LLC (f/k/a REIT Solutions, Inc.), SJB No. 2, LLC, Wet One, LLC (Attachments: # (1) Exhibit A) (Steele, Amanda)
Document posted on Nov 10, 2021 in the bankruptcy, 13 pages and 0 tables.
Bankrupt11 Summary (Automatically Generated)
OBJECTION OF THE NOTEHOLDER CLAIMANTS TO MOTION OF DEBTORS TO QUASH NOTICES OF DEPOSITION AND PRODUCTION REQUESTS REIT Solutions II, LLC (f/k/a REIT Solutions, Inc.), SJB No. 2, LLC, JJT No. 1, LLC, Wet One, LLC and DLF No. 3, LLC (collectively, the “Noteholder Claimants”) object (this “Objection”) to the Motion of Debtors to Quash Notices of Deposition and Production Requests [D.I. 223] 1 (the “Motion to Quash”).2 See Declaration of Scott J. Bell (“Bell Declaration” or “Bell Dec.”), ¶ 4; see also Exhibit “A” – Proof of Claim of REIT Solutions II, LLC (f/k/a REIT Solutions, Inc.)(the “REIT Solutions Claim”), Proof of Claim of SJB No. 2, LLC (the “SJB Claim”), Proof of Claim of JJT No. 1, LLC (the “JJT Claim”), Proof of Claim of Wet One, LLC (the “Wet One Claim”) and DLF No. 3, LLC (the “DLF Claim” and, together with the REIT Solutions Claim, the SJB Claim, the JJT Claim and the DLF Claim, the “Noteholder Claims”).3 5.In fact, the Omega Obligor is offsetting the Noteholder Claimants’ money for amounts owing by the Debtors under the Omega Master Lease. 5 As noted in the RSA Objection, the Noteholder Claims reserve all rights, remedies, claims, defenses, and positions against the Omega Entities, including but not limited to all challenges as to future setoffs under the Notes.Furthermore, the Noteholder Claimants reserve all rights, positions, claims, and defenses in connection with the Maryland Litigation and any claim that has been made or could have been made in that proceeding.
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Document ContentsUNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE In re: Chapter 11 GULF COAST HEALTH CARE, LLC, et al., Case No. 21-11336 (KBO) Debtors. (Jointly Administered) Re: Docket Nos. 223 & 225 OBJECTION OF THE NOTEHOLDER CLAIMANTS TO MOTION OF DEBTORS TO QUASH NOTICES OF DEPOSITION AND PRODUCTION REQUESTS REIT Solutions II, LLC (f/k/a REIT Solutions, Inc.), SJB No. 2, LLC, JJT No. 1, LLC, Wet One, LLC and DLF No. 3, LLC (collectively, the “Noteholder Claimants”) object (this “Objection”) to the Motion of Debtors to Quash Notices of Deposition and Production Requests [D.I. 223] 1 (the “Motion to Quash”).2 In support of their Objection, the Noteholder Claimants respectfully state: I. INTRODUCTION 1. By their objections to the Debtors’ Restructuring Support Agreement and DIP credit facility, the Noteholder Claimants have raised a number of serious procedural and substantive concerns about the expedited restructuring transactions proposed by the Debtors. See generally Objection of the Noteholder Claimants to the Motion of Debtors for Entry of Order Approving Assumption of Restructuring Support Agreement (D.I. 186)(the “RSA Objection”). These concerns include the benefits afforded to the Debtors’ affiliates and equity sponsors, the lack of a meaningful market check, and the fact that the RSA amounts to a sub rosa plan without 1 Capitalized terms used but not defined herein are intended to have the meanings ascribed to them in the Motion to Quash. 2 OHI Asset Funding (DE), LLC has filed a Joinder to the Motion to Quash (D.I. 225) (the “Joinder”). This Objection responds to the Joinder as well as to the Motion to Quash.
1the safeguards and statutory compliance of a full plan confirmation hearing. See RSA Objection at ¶¶ 1-3, 24-41. Recognizing that the RSA Objection initiated a contested matter raising fact issues as to the negotiation, documentation, and approval of the RSA, the Noteholder Claimants promptly served Rule 30(b)(6) deposition notices and related document production requests upon the Debtors and Omega Entities. The Noteholder Claimants also initiated discussions with the Debtors, Omega Entities, and the Official Committee of Unsecured Creditors to assure that discovery would proceed in an efficient and non-duplicative manner. 2. Instead of engaging on these discovery issues, the Debtors and Omega Entities have raised a threshold challenge to the Noteholder Claimants’ standing. Specifically, the Debtors assert that the Noteholder Claimants are not creditors in these cases, whether through rights of subrogation or otherwise. See Motion to Quash, ¶¶ 26-40. And based upon this supposed lack of creditor status, the Debtors and Omega Entities seek to bar the courthouse door against the Noteholder Claimants—declining to respond to discovery, and presumably challenging the ability of the Noteholder Claimants to appear and argue in these cases. See Id. at ¶ 43. By pursuing this threshold challenge and declining to engage on discovery logistics—all while declining to adjourn a hearing date approaching on November 23—the Debtors and Omega Entities appear to be trying to run out the clock on the requested discovery. 3. But the Debtors and Omega Entities fail in their threshold challenge. The Noteholder Claimants are creditors in these cases, by virtue of $900,000 in setoffs taken by the Omega Entities based upon defaults by the Debtors under the Omega Master Lease. As explained below, these setoffs have subrogated the Noteholder Claimants to the Omega Entities’ claims against the Debtors under the Omega Master Lease. While the Debtors and Omega Entities raise a number of technical objections to such subrogation, those objections are defeated 2
2by the plain language of the Bankruptcy Code and applicable Third Circuit authority. As creditors and parties in interest, the Noteholder Claimants are entitled to be heard in these cases, and to prosecute discovery issued in connection with the contested matters they have initiated. The Motion to Quash should be denied. RELEVANT FACTS 4. Each Noteholder Claimant holds a $4,000,000 promissory note originally executed by CSE Mortgage LLC on November 30, 2006 (each, individually, a “Note”, and, collectively, the “Notes”). See Declaration of Scott J. Bell (“Bell Declaration” or “Bell Dec.”), ¶ 4; see also Exhibit “A” – Proof of Claim of REIT Solutions II, LLC (f/k/a REIT Solutions, Inc.)(the “REIT Solutions Claim”), Proof of Claim of SJB No. 2, LLC (the “SJB Claim”), Proof of Claim of JJT No. 1, LLC (the “JJT Claim”), Proof of Claim of Wet One, LLC (the “Wet One Claim”) and DLF No. 3, LLC (the “DLF Claim” and, together with the REIT Solutions Claim, the SJB Claim, the JJT Claim and the DLF Claim, the “Noteholder Claims”).3 5. On July 29, 2010, OHI Asset HUD Delta, LLC (“OHI” or the “Omega Obligor”) entered into an Assignment and Assumption Agreement with CSE, and assumed CSE’s obligations as payor under the Notes. See Bell Dec., ¶ 7, Exhibit 3. 6. The Omega Notes were executed and delivered to the Noteholder Claimants as part of the consideration for the sale of equity in certain healthcare facilities previously owned by the Noteholder Claimants’ affiliates: Delta Health Group, LLC, Cordova Rehab, LLC and Pensacola Health Trust, LLC (collectively, the “Delta Group”). The Delta Group transferred 3 True and correct copies of each of the Noteholder Claims that are being mailed to the Debtors’ proposed claims and noticing agent, Epiq 11, are attached hereto as Exhibit A. As of the time of this filing, the Court’s CM/ECF system would not accept electronic filing of proofs of claim, and the Debtors’ claims and noticing presently only accepts filling of proofs of claim via U.S. mail or hand delivery. See Gulf Coast Health Care, LLC Overview Page, Deadline to File Claims https://dm.epiq11.com/case/gchc/info (last accessed on November 11, 2021 at 10:44 p.m. (ET)). 3
3these the equity ownership of these facilities to CSE, which is a predecessor of the Omega Obligor (the “Florida Transaction”). The terms of the Florida Transaction were set forth in a Purchase and Sale Agreement date as of August 22, 2006 (as amended, the “PSA” or the “Purchase Agreement”). 7. Certain of the Omega Obligor’s affiliates are landlords (the “Omega Landlords” and, together with the Omega Obligor and their respective affiliates, including OHI Asset Funding (DE), LLC, the “Omega Entities”) to Debtor Gulf Coast Master Tenant I, LLC (the “Gulf Coast Tenant”) under an Amended and Consolidated Master Lease (as amended, consolidated and restated, the “Omega Master Lease”). 8. Under Section 2.10 of the Purchase Agreement executed in connection with the Florida Transaction, and subject to the terms and conditions in that Agreement, CSE was given the right to offset certain rent defaults under the Omega Master Lease against amounts owing under the Omega Notes. See Bell Dec., ¶ 6, Exhibit 2. 9. The Omega Obligor did not pay the Noteholder Claimants the interest installments due under the Notes on June 30, 2021 and September 30, 2021, resulting in deductions of $180,000 for each of the five claimants, and an aggregate deduction of $900,000. See Bell Dec., ¶¶ 9-10, Exhibit 3; see also Noteholder Claims. 10. On June 28, 2021, the Omega Obligor wrote the Noteholder Claimants and stated: we are providing this letter to you pursuant to section 2.10 of the PSA to advise you that a Rent Roll Default has occurred in respect of the Master Lease, which exceeds the amount of the pending interest payments due under the Promissory Notes. As such, OHI is exercising its right(s) of offset against interest payments due and owing to the Noteholders under the Promissory Notes. See Bell Dec., ¶ 8, Exhibit 4 (emphasis added). 4
411. As of November 12, 2021, each of the Noteholder Claimants has submitted their respective Noteholder Claims, attached hereto as Exhibit “A”, to this Court through the Debtors’ proposed claims and noticing agent. 12. On November 5, 2021, the Noteholder Claimants filed their RSA Objection and their related objection to the Debtors’ motion for approval of debtor-in-possession financing (the “DIP Objection”). 13. On November 7, 2021, the Noteholder Claimants served their Deposition Notices and Production Requests upon the Debtors and the Omega Entities. 14. On November 9, 2021, at the invitation and request of the Noteholder Claimants, the parties conducted a conference to discuss discovery issues. During that conference, counsel for the Debtors advised of their intention to challenge the standing of the Noteholder Claimants before responding to or otherwise progressing the Deposition Notices and Production Requests. Following discussion of counsel, the parties determined they were at impasse on this issue. 15. On November 10, 2021, the Debtors filed their Motion to Quash, and the Omega Entities filed their Joinder. RESPONSE AND OBJECTION 16. The Motion to Quash rests almost completely4 on one central premise—the Debtors’ contention that the Noteholder Claimants are neither creditors nor parties in interest in these cases. But the Noteholder Claimants are creditors—at the very least to the tune of the $900,000 that has already been setoff by the Omega Obligor against the Debtors’ rent defaults 4 The Debtors do attempt to flavor their Motion with a litany of irrelevant allegations about the Noteholder Claimants’ Delta Group affiliates, the request of those affiliates to serve on the Unsecured Creditors Committee and certain intercreditor agreements to which those affiliates are party. See Motion to Quash at ¶¶ 1-5. Because the Delta Group is not a party to the RSA Objection or related discovery, the Debtors’ overheated allegations, arguments and speculations concerning Delta Group are wholly beside the point. The Debtors acknowledge—as they must—that the intercreditor agreements do not bind the Noteholder Claimants. See Id. at ¶ 3 (“[t]he Omega Noteholders have no such restriction . . .”). It is therefore the standing of the Noteholder Claimants that is at issue here. 5
5under the Omega Master Lease, and potentially in greater amounts as and when further setoffs occur under the Notes.5 17. The Debtors resist this conclusion with strained and formalistic arguments. They suggest that they “are not party to any agreements” with the Noteholder Claimants, and that they “owe no outstanding amounts” to the Noteholder Claimants. See Motion to Quash, ¶ 26. They likewise emphasize that they are not a party to the Notes, and that the Noteholder Claimants are not a party to the Omega Master Lease. Id. 18. These “privity of contract” arguments miss the mark. The Noteholder Claimants’ Claims arise from the direct contractual linkage between the Purchase Sale Agreement, the Notes, and the Omega Master Lease. Taken together, these documents permit the Omega Obligor (on specified terms and conditions) to deduct amounts payable under the Notes, and to setoff those balances against delinquencies under the Omega Master Lease. In fact, the Omega Obligor is offsetting the Noteholder Claimants’ money for amounts owing by the Debtors under the Omega Master Lease. 19. Under these circumstances, the doctrine of equitable subrogation operates to give the Noteholder Claimants a claim against the Debtors in the amount of the setoffs consummated to date—regardless of privity of contract between the parties. Equitable subrogation operates “independent of any contractual relations between the parties.” Pearlman v. Reliance Ins. Co., 371 U.S. 132, 137 n.12 (1962) (quoting Memphis & L.R.R. Co. v. Dow, 120 U.S. 287, 301—02 (1887)). Accordingly, privity of contract cannot be deemed a requirement here. See Dow Chem. Corp. v. Weevil–Cide Co., 897 F.2d 481, 485 (10th Cir. 1990) (“[e]quitable subrogation depends upon no contract or privity”) (internal quotation marks and citation omitted); D.C. v. Aetna Ins. 5 As noted in the RSA Objection, the Noteholder Claims reserve all rights, remedies, claims, defenses, and positions against the Omega Entities, including but not limited to all challenges as to future setoffs under the Notes. 6
6Co., 462 A.2d 428, 431 (D.C. 1983); Rud. Degermark A.–B. v. Monarch Silk Co., 85 F. Supp. 535, 536 (E.D. Pa. 1949); In re Fischer, 184 B.R. 41, 43 (Bankr. M.D. Tenn. 1995); In re Zinn, No. 13-14270-LSS, 2017 WL 262044, at *5 (Bankr. D. Md. Jan. 18, 2017). 20. The Debtors seek to resist the force of this authority by deploying a variety of supposed tests and conditions for the application of equitable subrogation. See Motion to Quash, ¶¶ 29-40. Without in any way conceding that this discussion completely or correctly states the applicable choice of law or elements of equitable subrogation6, we respond to these points in turn: 21. The Omega Noteholders did not make any payment to protect their interests. (Motion to Quash, ¶¶ 30-31). The Debtors ignore the effect of the setoff, which was tantamount to a payment of the delinquent rent through the corresponding reduction of the Omega Obligors Note payments. The Third Circuit notes that “to subrogate a claim, payment in the technical sense is not required. Rather, whatever discharges the liability and is accepted as payment is sufficient.” In re LTC Holdings, Inc., 10 F.4th 177, 187 (3rd Cir. 2021). Here, by the admission of the Omega Obligor, Omega exercised rights of setoff—which resulted in the Note payments being reduced by the amount outstanding under the Omega Master Lease. These redirected monies are a “discharge of liability” under the Omega Master Lease within the meaning of the Third Circuit’s ruling in LTC Holdings. 22. The Omega Noteholders did not pay off the entire debt. (Motion to Quash, ¶¶ 32-33.) In making this argument, the Debtors ignore the plain language of the Bankruptcy Code, which expressly permits subrogation based upon partial payment: 6 Compare Fishman v. Murphy, 72 A.3d 185, 195-96 (Md. 2013) (“[e]quitable subrogation is appropriate in situations where it is necessary to prevent unjust enrichment, even if the plaintiff has not argued that it is entitled to equitable subrogation”); see also In re The Medicine Shoppe, 210 B.R. 310, 313-14 (Bankr. N.D. Ill. 1997)(surveying different approaches to requirements for equitable subrogation). 7
7[e]xcept as provided in subsection (b) or (c) of this section, an entity that is liable with the debtor on7, or that has secured, a claim of a creditor against the debtor, and that pays such claim, is subrogated to the rights of such creditor to the extent of such payment. 11 U.S.C. § 509(a)(emphasis added). The statute goes on to provide for subordination of the partial subrogation claim until such time as the creditor has been paid in full. See 11 U.S.C. §509(c). 23. Taken together, these provisions eliminate any doubt. The Bankruptcy Code expressly authorizes partial subrogation of the type claimed by the Noteholder Claimants here. The Debtors purport to cite the Third Circuit’s decision in LTC Holdings for the contrary proposition. See Motion to Quash, ¶ 32, citing LTC Holdings, 10 F.4th at 185. But the Debtors have misread the case, and are citing to the portion of the decision considering subrogation at common law. As the Third Circuit explains, Section 509 of the Bankruptcy Code modifies the common law requirements: [i]n a departure from the general common-law rule, Section 509(a) provides that a surety is partially subrogated to the rights of a creditor to the extent that the surety has made any payments (i.e., short of payment in full). However, Section 509(c) provides that those subrogation rights are subordinated to the remainder of the creditor’s claim until the creditor has been paid in full. LTC Holdings, 10 F.4th at 186 (emphasis in original). These requirements have been satisfied here, and the Noteholder Claimants are subrogated at the very least to the extent of the $900,000 deducted from their Note payments. See In re The Medicine Shoppe, 210 B.R. 310, 312-15 (Bankr. N.D. Ill. 1997)(guarantor equitably subrogated to secured position of bank after bank debited guarantor’s account for the remaining amount of the debt). 7 The Noteholder Claimants are “liable with” the Debtors on the Omega Master Lease by virtue of the setoff mechanism in the PSA, which has the effect of making the Noteholder Claimants secondarily liable for any “Rent Roll Defaults” (as defined in the PSA) where the other terms and conditions of the setoff have been satisfied. 8
824. The Debtor’s rent obligations have also not been reduced as a result of the alleged offset. (Motion to Quash, ¶¶ 33, 36). This argument strains credulity. The record confirms that the Omega Obligor deducted the amount of the Debtors’ lease defaults from the Note payments, and that this deduction was made by way of setoff. By both common usage and law, setoff contemplates a netting of debits and credits. In order for the Omega Obligor to have exercised this remedy, the withheld funds would have had to have been applied to the delinquent obligations under the Omega Master Lease. Were it otherwise, the Omega Obligor would have either misrepresented the predicate of its setoff, committed an improper setoff, or both. This argument plainly fails, and the only real question is why it is the Debtors making such an argument? They are urging a position that plainly favors the Omega Entities at the expense of the estate and its stakeholders—a good demonstration of the flaws in the RSA in microcosm. 25. Subrogation would cause an injustice. (Motion to Quash, ¶¶ 34-35). This argument reiterates prior points about privity of contract, and fails for the same reason. The greater injustice here is that the Omega Obligor is trying to avoid crediting its prior setoffs against the past due rent, all in service of trying to prevent the Noteholder Claimants from being heard in these cases. 26. Finally, we observe that the Noteholder Claimants have now submitted their proofs of claim in these cases, see infra, n.3, and that these Claims are deemed allowed under the Bankruptcy Code pending the filing of an objection. See 11 U.S.C. § 502(a). Nothing contained in the Motion to Quash refutes the prima facie case the Noteholder Claimants have pleaded in their Claims and supporting materials. It necessarily follows that the Motion does not establish an adequate or sufficient basis to deprive the Noteholder Claimants of their right to be heard in these cases, or to excuse the Debtors and the Omega Entities from their discovery obligations. 9
9The Debtors have proposed far reaching relief on a highly expedited schedule. They should discontinue their efforts to exclude the Noteholder Claimants from meaningful participation in these cases, and work cooperatively to complete the pending discovery. 27. Because the substance of the Motion to Quash requests relief that amounts to an objection to the Noteholder Claimants’ claims, the Noteholder Claimants are entitled to all procedural protections and due process that accompany claim objection proceedings. See, e.g., In re La Rouche Indus., Inc., 307 B.R. 774, 781 (D. Del. 2004) (holding that creditor was entitled to due process protections, including adequate notice and an adequate opportunity to respond, in connection with claim objection); In re Lomas Fin. Corp., 212 B.R. 46, 54 (Bankr. D. Del. 1997) (recognizing the “general scheme of procedural due process safeguards contemplated by Congress for claim objection proceedings”). Such protections include more than two days’ notice of the claim objection, the ability to take discovery, and an opportunity to submit briefing to the Court on issues germane to the claim objection. See 9 Collier on Bankruptcy, 3007.01 (16th 2021) (“Since a [claim] objection initiates a contested matter, numerous rules applicable in adversary proceedings will be applicable”); see also FED. R. BANKR. P. 9014. Such protections also require compliance with this Court’s Local Rules pertaining to claim objections, which the Motion to Quash does not adhere to. See generally L.R. 3007-1 and 3007-2. And, unlike the Debtors’ Motion to Quash, typical claim objection proceedings are certainly not predicated on a party’s unverified assertions of fact where they have not undertaken any basic diligence to obtain information relevant to the claim objection. See Motion to Quash at p. 7, n.4 (Debtors admitting that they “have not sought to verify the descriptions, relationships, or other information” asserted in the Motion to Quash). 10
1028. Because the Debtors assert that the Noteholder Claimants do not hold claims, the Debtors must comply with, and the Noteholder Claimants are entitled to, the typical procedural protections attendant to claim objection proceedings. V. RESERVATION OF RIGHTS 29. Nothing in this Objection is intended to be, or should be construed as, a waiver by Noteholder Claimants (including all such affiliates of Noteholder Claimants) of any of their rights under the Omega Notes, the PSA, and other agreements related to the Florida Transactions, the Bankruptcy Code, or any other applicable law. Furthermore, the Noteholder Claimants reserve all rights, positions, claims, and defenses in connection with the Maryland Litigation and any claim that has been made or could have been made in that proceeding. The Noteholder Claimants all rights, positions, claims, and defenses regarding the appropriate jurisdiction or forum for the Noteholder Claimants to adjudicate any dispute or otherwise proceed with any litigation concerning the Omega Obligor or any of the other Omega Entities. The Noteholder Claimants reserve the right to further amend, modify, or supplement this Objection at any time and to request the postponement and/or adjournment of any hearing to consider the Motion to Quash. The Noteholder Claimants also reserve all their rights as creditors in these bankruptcy cases, including in connection with any proof of claim the Noteholder Claimants file in these cases. VI. CONCLUSION WHEREFORE, the Noteholder Claimants respectfully request that this Court enter an order (i) denying the Motion to Quash; (ii) requiring the Debtors and the Omega Entities to comply with their pending discovery obligations; and (iii) granting the Noteholder Claimants such other and further relief as this Court deems just and appropriate under the circumstances. 11
11Dated: November 11, 2021 Wilmington, Delaware /s/ Amanda R. Steele Paul N. Heath (No. 3704) Amanda R. Steele (No. 5530) Robert C. Maddox (No. 5356) Christopher M. De Lillo (No. 6355) RICHARDS, LAYTON & FINGER, P.A. One Rodney Square 920 North King Street Wilmington, DE 19801 Tel: (302) 651-7700 Fax: (302) 651-7701 Email: firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com - and - David L. Swanson LOCKE LORD, LLP 2200 Ross Avenue, Suite 2800 Dallas, Texas 75201 Telephone: (214) 740-8514 Facsimile: (214) 740-8800 Email: firstname.lastname@example.org - and - Jonathan W. Young LOCKE LORD, LLP 111 Huntington Avenue, 9th Floor Boston, Massachusetts 02199-7613 Telephone: (617) 239-0367 Facsimile: (855) 595-1190 Email: email@example.com 12
12- and - Stephen J. Humeniuk LOCKE LORD, LLP 600 Congress Avenue, Suite 2200 Austin, Texas 78701 Telephone: (512) 305-4838 Facsimile: (512) 391-4708 Email: firstname.lastname@example.org Counsel to REIT Solutions II, LLC (f/k/a REIT Solutions, Inc.), SJB No. 2, LLC, JJT No. 1, LLC, Wet One, LLC and DLF No. 3, LLC 13