Capital Finance, LLC v. Rosenberg et al
Filing
105
MEMORANDUM OPINION. Signed by Judge Richard D. Bennett on 1/23/2019. (krs, Deputy Clerk)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
CAPITAL FINANCE, LLC,
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Plaintiff
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v.
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OSCAR ROSENBERG, et al.,
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Defendant.
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Civil No. RDB-17-2107
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MEMORANDUM OPINION
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On July 1, 2015 Plaintiff Capital Finance, LLC (“Capital Finance”) and a group of eight
skilled nursing facilities and long term acute care hospitals (collectively, the “Borrower”),
controlled by Defendants Josef Neuman (“Neuman”) and Oscar Rosenberg (“Rosenberg”)
(collectively, “Defendants”), entered into a Credit and Security Agreement (the “Credit
Agreement”) and a Revolving Loan Note. Pursuant to these contracts, Capital Finance agreed
to furnish capital financing to these long-term care facilities, thereby insuring that they could
maintain a source of working capital while experiencing significant delays between rendering
healthcare services and receiving payments for these services. Neuman and Rosenberg
personally guaranteed this financing.
As a condition precedent for obtaining additional loan advances under these contracts,
Neuman, as the Manager of Borrower, submitted one-page Borrowing Base Certificates which
warranted that the facilities were in accordance with the terms of the loan documents and had
paid all state and federal payroll taxes. Additionally, the Credit Agreement required Borrower
to deposit the proceeds from its collateral into bank accounts at Banco Popular protected by
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a deposit account control agreement (“DACA”).
Included among these proceeds were
Medicare funds and intergovernmental transfer payments (“IGT” payments).
To secure loans from Capital Financing, Rosenberg and Neuman executed so-called
“bad boy” guaranties, which required them to satisfy all outstanding obligations under the
Credit Agreement upon Borrower’s commission of “fraud or illegal acts.” These guaranties
were triggered when Borrower failed to pay payroll taxes, a violation of federal law. Neuman
doubled-down on this illegal activity by submitting, as manager of Borrower, Borrowing Base
Certificates which falsely represented that Borrower had paid these taxes when in fact the
payroll taxes had not been paid.
Between December 2016 and January 2017, Neuman further violated the terms of the
loan agreement by diverting Medicare and IGT payments from DACA-controlled accounts to
a Chase account over which Capital Finance had no control. Later, on June 20, 2017, Neuman
made another attempt to divert funds by instructing a hospital to direct $160,179.80 in IGT
payments to a non-DACA controlled account at Santander Bank. A Show Cause Order
entered by the United States District Court for the Northern District of Texas with respect to
the diversion attempt was resolved by Defendants paying money to Plaintiff.
After a two-day bench trial on January 9, 2019 and January 10, 2019, and for the reasons
set forth below, this Court concludes as follows:
1. By submitting false Borrowing Base Certificates to obtain loan advances, Neuman
committed fraud and caused Capital Finance to incur 575,705.65 in actual damages.1
Plaintiff is further awarded pre-judgment interest at the rate of six percent (6%) per
1 This amount is included in, and therefore duplicative of, the total amount owed under the guaranty
agreements.
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annum and post-judgment interest at the rate of ten percent (10%) per annum.
Punitive damages are warranted in the amount of $200,000.00.
2. Neuman diverted IGT payments and Medicare payments from the DACA-controlled
accounts at Banco Popular, causing Borrower actual damages of $414,427.22.2 Plaintiff
is awarded pre-judgment interest at the rate of six percent (6%) per annum and postjudgment interest at the rate of ten percent (10%) per annum.
3. Rosenberg and Neuman are obligated to pay Capital Finance the outstanding
obligations under the Guaranty agreements. As of January 8, 2019 that amount is
$1,304,731.37, representing the sum of $575,705.65 in unpaid principle; $255,144.55 in
default interest; $235,440.82 in legal fees (excluding fees associated with this litigation);
$173,359.88 for field exam work; and $65,080.47 for lenders’ monthly fees. Interest,
at the default rate, continues to accrue on the unpaid balance at a per diem rate of
$200.22. Plaintiff is further awarded post-judgment interest at the rate of ten percent
(10%) per annum.
4. Judgment shall be ENTERED in favor of Capital Finance on Counts III and IV
(Breach of Contract); Count V (Fraud); and Count VI (Conversion).
5. Rosenberg and Neuman SHALL PAY to Capital Finance a total of $1,304,731.37.
6. Neuman SHALL PAY to Capital Finance $200,000.00 in punitive damages, over and
above the total amount of $1,304,731.37.
Pursuant to Federal Rule of Civil Procedure 52(a), the following memorandum constitutes this
Court’s findings of fact and conclusions of law.
PROCEDURAL BACKGROUND
On July 26, 2017 Capital Finance initiated this lawsuit by filing a Complaint for
Confession of Judgment against Rosenberg and Neuman pursuant to Local Rule 108 (D. Md.
2018). (ECF No. 1.) On July 28, 2017, this matter was referred to Magistrate Judge A. David
2 This amount is included in, and therefore duplicative of, the total amount owed under the guaranty
agreements.
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Copperthite for his review pursuant to 28 U.S.C. § 636 and Local Rules 301 and 302. (ECF
No. 3.) On September 6, 2017, Judge Copperthite entered an Order directing Confession of
Judgment in favor of Plaintiff against Defendants. (ECF No. 8.) In an accompanying
Memorandum Opinion, the Magistrate Judge found that Borrower had breached its Credit
Agreement with Capital Finance by “divert[ing] significant funds from being deposited into
the AR Deposit Account and instead allocat[ing] said funds to an account not subject to its
deposit account agreement with Capital [Finance].” (ECF No. 7, at 5.) As a result of this
breach, Capital Finance was entitled to a confession of judgment against Rosenberg and
Neuman pursuant to the guaranty agreements it had reached with Defendants. (Id. at 3-4, 56.)
On October 4, 2017, Rosenberg and Neuman filed a Motion to Open, Modify, or
Vacate Judgment by Confession, arguing that liability had not attached to Rosenberg and
Neuman because three necessary conditions enumerated in Section 1(d) of the guaranties had
not occurred. (ECF No. 11.) Rosenberg and Neuman’s primary argument had been, and
remains, that they are not liable under the guaranties unless Borrower committed no less than
three acts of egregious misconduct: collude to undergo an involuntary bankruptcy proceeding,
improperly file a voluntary bankruptcy petition, and commit fraud. (Id. at 6.)
On November 1, 2017, Magistrate Judge Copperthite recommended that this Court
deny Rosenberg and Neuman’s Motions. (ECF No. 17.)
He concluded that Defendants’
interpretation of the contract, which they still maintain today, “makes no sense.” (Id. at 6.)
This Court adopted the Magistrate Judge’s Report and Recommendation. (ECF No. 19.) On
December 4, 2017, Defendants filed a Motion to Alter or Amendment Judgment, or, in the
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Alternative, for Relief from Judgment and Request for Stay of Execution. (ECF No. 20.) A
notice of Appeal to the United States Fourth Circuit Court of Appeals followed. (ECF No.
23.)
On April 3, 2018, this Court conducted a telephone conference with all parties.
Following the telephone conference, this Court issued a Letter Order GRANTING the
Defendant’s Motion to Alter or Amend Judgment (ECF No. 20), VACATING the Confession
of Judgment, and permitting Defendants to file a Response to Plaintiff’s Complaint. (ECF
No. 27.) On the following day, Defendants withdrew their Notice of Appeal. (ECF Nos. 23,
29.) In September 2018, Defendants filed an Amended Complaint (ECF No. 42), adding
breach of contract claims against Rosenberg and Neuman (Counts III and IV), a fraud claim
against Neuman (Count V) and a claim of conversion against Neuman (Count VI).
This Court conducted a two-day bench trial on January 9, 2019 and January 10, 2019.
After the conclusion of Plaintiff’s case, Defendants moved for judgment on partial findings
pursuant to Rule 52(c), which this Court GRANTED IN PART and DENIED IN PART.
Specifically, this Court granted Defendants’ motion to dismiss the Confession of Judgment
claims against Rosenberg and Neuman (Counts I and II) because this Court had previously
vacated the Confession of Judgment against Defendants and permitted them to respond to
the Complaint. (ECF Nos. 8, 20.) The Motion was denied with respect to the remaining
claims.
The following claims proceeded to trial:
(1) Capital Finance’s breach of contract claim against Rosenberg (Count III);
(2) Capital Finance’s breach of contract claim against Neuman (Count IV);
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(3) Capital Finance’s fraud claim against Neuman (Count V);
(4) Capital Finance’s conversion claim against Neuman (Count VI).
FINDINGS OF FACT
I.
The Borrower’s Business.
In early August 2015, Rosenberg and Neuman acquired eight groups of skilled nursing
facilities consisting of Plano Specialty Hospital Operator LLC, Plano Healthcare Residence
Operator LLC, Mesa Hills Specialty Hospital Operator LLC, Mesa Hills Healthcare Residence
Operator LLC, Plum Creek Specialty Hospital Operator LLC, Plum Creek Healthcare
Residence Operator LLC, Midwest City Healthcare Residence Operator LLC, and Specialty
Hospital of Midwest City Operator LLC (collectively, the “Borrower”). (Stip. 1.)3
Rosenberg and Neuman had a 50/50 ownership interest in the Borrower. (Pl.’s Ex. 1,
at CAPFI 127.) While Rosenberg and other investors advanced funds to acquire these
properties, Neuman did not contribute financially. (ECF No. 100, at 43:19-24.)4 Instead,
Neuman assumed the day-to-day operations of the company, drawing on his years of
experience in the industry. (ECF No. 102, at 64:2-10; 97:21–23.) He acted as the Borrower’s
main point of contact with Capital Finance; Jeffrey Stein, its Executive Managing Director,
spoke with him regularly. (ECF No. 101, at 50:3-4; 67:7-11.)
Government programs like Medicare and Medicaid constituted significant payor
sources for the services that Borrower rendered. (ECF No. 100, at 7:1-8.) Payments from the
Medicare program flowed into the bank account designated by the facilities. (ECF No. 99, at
3 “Stip.” refers to stipulations contained in the Pretrial Order. (ECF No. 92.)
4 The trial transcript appears at ECF Nos. 99, 100, 101, and 102.
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8:19-25.) Pursuant to a government program, the Borrowers received intergovernmental
transfer payments (“IGT” payments) through its partnership with Childress County Hospital.
(ECF No. 101, 54:2-6.) Mr. Young testified that the appropriate government entity would
remit these payments to a bank account associated with Childress County Hospital, which
would in turn disburse these funds to the Borrowers. (ECF No. 101, at 58:11-18.)
II.
Capital Finance’s Services in the Healthcare Industry.
Capital Finance provides working capital financing to healthcare service providers
through revolving lines of credit. (ECF No. 99, at 50:14-15.) Because skilled nursing facilities
experience significant delays between billing for services and receiving Medicare and Medicaid
payments, revolving lines of credit ensure that these facilities have the working capital
necessary to support their operations. (Id. at 50:15-51:1.) To ensure the that its loans are
repaid, Capital Finance assumes the facilities’ accounts receivable and related assets as
collateral. (Id. at 51:5-9.) In practice, Capital Finance designates bank accounts to which the
proceeds of its collateral must be paid, so that it may perfect its interests in these funds. (Id.
at 51:9-14). When these funds enter the protected accounts, they are used to pay down the
borrower’s loan obligations. (Id. at 51:15-18.)
III.
The Credit Agreement and its Terms.
On July 1, 2015, Capital Finance entered into a Credit and Security Agreement (the
“Credit Agreement”) with Borrower (Stip. 1; Pl.’s Ex. 1.) The Credit Agreement provided
for a revolving credit financing facility to Borrower for operation of Borrower’s facilities (Pl.’s
Ex. 1), which is evidenced by a Revolving Loan Note (as amended) in a maximum amount of
$9,000,000.00 (Stip. 2). As the manager of each Borrower, Neuman executed the Credit
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Agreement and the Revolving Loan Note on their behalf. (Pl.’s Exs. 1, 2.) Capital Finance’s
Executive Managing Director, Jeffrey Stein, negotiated the terms of this credit agreement with
Mr. Neuman. (ECF No. 99, at 55:8-15.) Both parties were represented by counsel. (Id. at
55:16-19.)
Pursuant to Section 9.1 of the Credit Agreement, Borrower granted Plaintiff a lien and
security interest in, inter alia, all of Borrower’s accounts and money (the “Collateral”). (Pl.’s Ex.
1; ECF No. 100, at 44:6–25.) Borrower agreed, in Section 2.9(a) and (f) of the Credit
Agreement, to ensure that all Collateral would be paid directly from its account debtors into
designated accounts controlled by a deposit account control agreement (“DACA”). Borrower
was prohibited from using any other bank account for collection of its accounts. (ECF No.
99, at 59:5–17, 61:24–62:7; Pl.’s Ex. 1, at CAPFI-31 § 2.9(a).) Mr. Neuman testified that he
understood this requirement. (ECF No. 100, at 45:18-21.)
The Credit Agreement contained many additional provisions designed to ensure the
repayment of Capital Finance’s loans and protect Plaintiff in the event of default. Mr.
Neuman, who had years of experience in this industry, indicated that he reviewed this
document “very carefully.” (ECF No. 100, at 44:3-5.) At trial, he expressed familiarity with its
terms. (Id. at 44:6-22.)
Capital Finance of course charged interest for its loans. Under the Credit Agreement,
it assigned a base interest rate tied to the LIBOR rate.5 (ECF No. 99, at 58:9–24.) In the event
5 The London Interbank Offered Rate, or “LIBOR” rate, is a fluctuating benchmark interest rate used by
banks around the world.
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of default, the contract penalizes the Borrower with a heightened interest rate of an extra five
percent (5%) per annum above the base rate. (Id. at 64:1–6; Pl.’s Ex. 1, CAPFI 70 § 10.3.)
Article 4 of the Credit Agreement contains numerous affirmative covenants governing
Borrower’s use of funds. More than one provision explicitly requires Borrow to pay its taxes.
Section 4.2, titled “Payment and Performance of Obligations” requires Borrower to “pay and
discharge, and cause each Subsidiary to pay and discharge, at or before maturity, all of their
respective obligations and liabilities, including tax liabilities.” (Pl.’s Ex. 1, at CAPFI 43.)
Section 4.4(b) similarly governs the payment of taxes, providing that “Borrower will, and will
cause each subsidiary to, pay or cause to be paid all Taxes at least five (5) days prior to the date
upon which any fine, penalty, interest or cost for nonpayment is imposed.” (Pl.’s Ex. 1, at
CAPFI 43.) Mr. Stein testified that it was “critical” that Borrowers remain current on their
obligations, including payroll taxes, because the IRS could “prime” Capital Finance’s liens.
(ECF No. 99, at 52:16–21, 60:23-61:5, 73:25–74:7.) In other words, tax liens by the IRS can
assume priority over the liens of secured creditors, potentially limiting creditors’ ability to
collect on their collateral in the event of default.
Article 10 governs events of default and is designed to ensure that Borrower used its
capital wisely and protected Capital Finance’s ability to enforce its contract. Section 10.5,
“Application of Proceeds” governs the borrower’s ability to direct payments following an
event of default. (Pl.’s Ex. 1, at CAPFI 70.) Capital Finance understood this provision to
require Borrowers to continue proper billing and collection processes in accordance with the
credit agreement. (ECF No. 99, at 64:13-17.)
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Article 11, Section 11.1 holds Borrower liable for all costs and expenses incurred by
Plaintiff in connection with any litigation, dispute, suit or proceeding relating to the Credit
Agreement and the guaranties and in connection with any workout, collection, bankruptcy,
insolvency and other enforcement proceedings under the Credit Agreement and/or the
guaranties. (Pl.’s Ex. 1, at CAPFI-73 § 11.1(c)–(d); ECF No. 99, at 65:9-15.)
Finally, Section 12.2, “No Waivers” provides that:
No failure or delay by Agent or any Lender in exercising any right, power, or
privilege under any Financing Document shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.
(Pl.’s Ex. 1, at CAPFI 75.)
Mr. Stein testified that this provision acted as another means of ensuring that
Capital Finance had not waived any right by waiting to enforce its remedies. (ECF No.
99, at 65:16-23.)
Pursuant to the Credit Agreement, funds were advanced to Borrower based on its
representations that it was in compliance with the Credit Agreement and had paid all applicable
taxes. With these conditions satisfied, Capital Finance would advance funds representing a
percentage of the Borrower’s eligible collateral, which included the Borrowers’ eligible
accounts receivable. (ECF No. 99, at 73:2-11.) This process is memorialized in the Credit
Agreement, which explicitly requires Borrower to submit Borrowing Base Certificates as a
condition precedent to receiving loans. (ECF No. 99, at 57:8–58:1; Pl.’s Ex. 1, at 7.)
Specifically, the contract provides that a “Responsible Officer of Borrower” must execute a
certificate “appropriately completed and substantially in the form of Exhibit A” to the
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agreement. (Pl.’s Ex. 1, at CAPFI 6; ECF No. 99, at 57:8-15.) Page three of this form contains
a disclaimer of personal liability. (Pl.’s Ex. 1, Ex. A, at CAPFI 109.)
Although the parties had the option to use an exact duplication of Exhibit A as the
Borrowing Base Certificate, they opted to use a one-page form instead. The disclaimer
language does not appear in the form that Borrower and Capital Finance exchanged
throughout the life of the loan. (compare Pl.’s Ex. 1, Ex. A, at CAPFI 109 with Pl.’s Exs. 15,
16.) Consistent with the parties’ choice to use an alternative form, Mr. Stein testified that he
would not have signed a contract that knowingly waived Capital Finance’s right to remedy acts
of fraud. (ECF No. 99, at 66:20-23.)
In lieu of a disclaimer, the following affirmation appears on the Borrowing Base
Certificates:
Borrower, by the execution of this Report: (a) Hereby ratifies, confirms, and
affirms all of the terms, and further certifies that the Borrower is in compliance
with the Loan Documents as of the date hereof and (b) Hereby certifies that
the Borrower has paid all State and Federal payroll withholding taxes
immediately due and payable.
(Pl.’s Exs. 15, 16.)
Mr. Stein testified that the Borrowing Base Certificates specially identify the payment
of payroll withholding taxes because these payments are “critical” due to the risks of losing
collateral based on the government’s ability to prime Plaintiff’s liens. (ECF No. 99, at 52:16–
21, 73:25–74:7.)
IV.
The Deposit Account Control Agreement and its Terms.
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DACAs are a critical component of Capital Finance’s lending relationships. (ECF No.
101, at 55:14–16; ECF No. 99, at 52:6–15, 73:12-19.) As Mr. Young testified, these types of
accounts are common in the healthcare lending industry because they protect and preserve the
proceeds of the borrowers’ collateral and facilitate loan payments. (ECF No. 101, at 55:3-13.)
Mr. Stein explained that DACAs are “critical” because they constitute the primary means by
which Capital Finance perfects its security interest in funds received by borrowers. (ECF No.
99, at 52:6–15; 73:17-19.) Mr. Neuman was apprised of these facts; during his testimony, he
indicated that he understood that Capital Finance would be “in a worse position” if funds
were deposited into accounts other than the DACA-controlled accounts. (ECF No. 100, at
46:5–9.)
On July 1, 2015, Borrower, Plaintiff, and Banco Popular North America (“Banco
Popular”) entered into a DACA. (Pl.’s Ex. 24.) Pursuant to this agreement and the Credit
Agreement, this Banco Popular account constituted the DACA-controlled account into which
all proceeds of Capital Finance’s collateral were to flow. Any funds received by Borrower into
an account other than the Banco Popular accounts had to be immediately remitted to Plaintiff
from July 1, 2015 forward. (ECF No. 99, at 60:2–12; Pl.’s Ex. 1, CAPFI-2 § 1.1 (definition of
“Accounts”) and CAPFI-32 § 2.9(f).) The Credit Agreement provides that Borrower’s failure
to observe or perform any covenant contained in Section 2.9 constitutes an Event of Default.
(Pl.’s Ex. 1, at CAPFI-6 § 10.1(b)).
Neuman ultimately acknowledged that the Credit Agreement defined the term
“Accounts” to provide for any right to payment of a monetary obligation, whether or not
earned by performance. (ECF No. 100 72:1-7; Pl.’s Ex. 1 at CAPFI 2.) Consistent with this
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definition, both intergovernmental transfer payments (“IGT payments”) and Medicare
payments constituted a portion of the collateral for Capital Finance’s loans. (ECF No. 101
54:2–16; ECF No. 99, at 83:23-84:4; Pl.’s Ex. 1 at § 1.1 (definition of “Accounts”) and § 9.1.)
During his testimony, Neuman acknowledged that Medicare payments were “definitely part
of accounts receivable.” (ECF No. 100, at 48:20-22.) In accordance with this understanding,
and the terms of the Credit Agreement, Borrower was required to deposit IGT and Medicare
payments into DACA-controlled accounts at Banco Popular.
V.
The Guaranty Agreements and their Terms.
In accordance with its usual practice, Capital Finance required Rosenberg and Neuman
to execute personal guarantees to obtain a revolving line of credit. (Pl.’s Exs. 3, 4; ECF No.
99, at 69:18-20.) On June 26, 2015 both Defendants signed identical guaranty agreements.
(Pl.’s Exs. 3, 4.) They did so according to their own free will and without coercion or duress.
(Stip. 7.) The guaranties explicitly state, and testimony confirms, that they were a condition
precedent to receiving loans. (Pl.’s Exs. 3 & 4 (first WHEREAS clause); ECF No. 102, at
63:17–20.) At trial, Rosenberg agreed that “Capital Finance would not make the loan” without
these guaranties. (EF No. 102, at 63:17-20.)
The guaranties that Rosenberg and Neuman signed are so-called “bad boy guaranties,”
which trigger upon Borrower’s commission of certain acts of misconduct. Section 1(d) of the
guaranties lists three events, any one of which would trigger liability under the agreements.
Specifically, Section 1(d) provides:
Notwithstanding any provision herein to the contrary, Agent acknowledges that
this Guaranty and the Guaranteed Obligations hereby shall only be applicable
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and enforceable against the Guarantor in the event that: (a) Borrower colludes
with other creditors in causing an involuntary bankruptcy or insolvency
proceeding involving any of the Credit Parties in an effort to circumvent, avoid
or impair the rights of Agent or the Lenders, (b) a voluntary bankruptcy filing
by Borrower to the extent that a court of appropriate jurisdiction determines
that such filing was made otherwise than in accordance with applicable law, and
(c) any act of fraud or other illegal action taken by Borrower or any Credit Party
in connection with the Credit Agreement or any other Financing Document.
(Pl.’s Exs. 3 at 2, 4 at 2.)
In sum, the section references three events which would trigger liability on the part of the
Borrowers: (1) an improper involuntary bankruptcy; (2) an improper voluntary bankruptcy;
and (3) fraud or other illegal actions.
Mr. Stein explained that this type of provision is “widely used and designed to
incentivize[] the principals of the Borrowers to act in accordance [with] the credit agreement.”
(ECF No. 99, at 70:16-23.) In Stein’s experience, it would be highly unusual for all three
conditions mentioned in the provision (i.e., an involuntary bankruptcy, a voluntary
bankruptcy, and fraud or illegal action) to occur. (ECF No. 99, at 71:21-23.) Accordingly,
Stein understood the provision to require the occurrence of only one of the three conditions
precedent listed (ECF No. 99 71:3-72:1.)
While the first two events (involuntary and
voluntary bankruptcy filings) were “important” triggers, the third event was the key, as it
“incentiviz[ed] the principal of the borrowers to live up to the credit agreement.” (ECF No.
99, at 71:23-25.) This Court specifically finds that Mr. Stein was a credible and honest witness.
His understanding is the only logical interpretation of the guaranties of Rosenberg and
Neuman. Furthermore, any testimony of Neuman and Rosenberg suggesting that they
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believed all three criteria must be met was simply not credible at trial. In particular, Neuman
was not a credible witness.
Pursuant to the guaranties, each Defendant unconditionally and irrevocably
(i) guaranteed to Plaintiff the prompt and complete payment and performance when due of
all obligations under the Credit Agreement and (ii) agreed to pay all costs and expenses
incurred by Plaintiff (including the reasonable fees and disbursements of counsel and other
professionals) in connection with Plaintiff enforcing or defending its rights under the
guaranties and collecting the obligations (collectively, the “Guaranty Obligations”). (Pl.’s Exs.
3 & 4, at § 1(a).)
These guaranty agreements contained several provisions drafted to ensure that
Rosenberg and Neuman could not assert various defenses to the enforcement of the
guaranties.
Section 2, “Guaranty Absolute” provides that:
The liability of the Guarantor under this Guaranty shall be absolute and
unconditional irrespective of . . . any exchange, release or non-perfection of any
Collateral, or any release or amendment or waiver of or consent to departure
from any other guaranty, for all or any of the Guaranteed Obligations . . . [and]
any other circumstances which might otherwise constitute a defense available
to, or a discharge of, any Borrower, the Guarantor, or any other guarantor.
(Pl.’s Ex. 4, at CAPFI 197-98.)
Section 3, “Waiver” states that “Guarantor hereby waives . . . any requirement that the
Agent or Lenders . . . exhaust any right to take any action against any Borrower or any other
Person or any of the Collateral.” (Pl.’s Ex. 4, at CAPFI 198.)
VI.
The Borrowers Diverted Funds and Failed to Pay Taxes.
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In the fall of 2016, Capital Finance became aware that the Borrowers were having
financial difficulties.
(ECF No. 99, at 74:13-22.)
Around this time, Capital Finance
representatives attended a meeting with Borrowers and learned that Borrowers had closed two
of the eight facilities without notifying them. (ECF No. 99, at 75:5-6.) Concerned about the
financial health of the Borrowers, Capital Finance retained Breslin, Young & Slaughter
(“Breslin Young”), an experienced financial consulting firm. (Pl.’s Ex. 17; ECF No. 101, at
36:21-22; ECF No. 99, at 18:16-19; 75:12-19.) Prior to its retention, Capital Finance had
worked with Breslin Young for about fifteen years. (ECF No. 101, at 36:6-7.) The firm
specializes in performing field exams for commercial lenders in the healthcare industry to
assess the financial health of their borrowers. (ECF No. 101, at 35:4-14.)
Between November 1 and 3, 2016, Breslin Young performed an on-site field
examination of the Borrowers at the Concord Healthcare Group Facility. (ECF No. 101, at
36:21-22; ECF No. 99, at 18:16-19.) On December 9, 2016, Breslin Young provided a field
exam report to Capital Finance which recorded their findings. (Pl.’s Ex. 17; ECF No. 99, at
18:21-23.) Mr. Young testified that the field exam yielded several disturbing revelations.
Instead of directing accounts receivable to DACA controlled accounts at Banco Popular,
Borrowers had diverted funds to Chase bank accounts. Borrowers had also failed to pay
payroll withholding taxes and provider taxes.
The evidence clearly establishes that Neuman authorized the unlawful diversions
uncovered by the field exam. At trial, he admitted that he was the day-to-day manager of
Borrower. (ECF No. 102 64:2–10.) Neuman and Rosenberg were the only signatories to the
bank accounts for each of the eight Borrower entities. (ECF No. 102, at 70:22–71:3, 75:6-12;
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ECF No. 100, at 46:19–47:9.) Rosenberg, who had a hands-off role in the venture, denied
making the wrongful transfers. (ECF No. 102, at 64:7-10; 71:1-72:21.) Although Neuman also
denied diverting Medicare and IGT payments to Chase accounts, his deposition testimony
indicated that he was “authorizing every disbursement” from the Borrower accounts and
signed off on disbursals as small as $75.00. (ECF No. 100 46:10-47:4.) Accordingly, the clear
evidence compels this Court to reject Neuman’s claim and find that he personally authorized
the unlawful transfers.
A. Borrower illegally failed to pay payroll withholding taxes and provider
taxes, then fraudulently represented that it had satisfied its tax
withholding requirements.
The evidence shows that Borrower illegally failed to pay payroll withholding taxes. The
field exam revealed that Borrower was delinquent in paying payroll and provider taxes. (ECF
No. 99, 19:8-25, 21:3-5, 21:25-22:15.) Having analyzed tax forms, payroll reports, and bank
statements for two of Borrower’s facilities and corresponded with Matt Weisz, an employee
of Concord Healthcare Group acting on behalf of Borrower, Breslin Young concluded that
Borrower was delinquent in payment of $251,000 in payroll taxes that should have been paid
on November 10, 2016, November 17, 2016, and December 2, 2016. (ECF No. 99, at 19:725, 20:24–21:10, 33:5–11.) Additional evidence and testimony confirms payroll tax
deficiencies. On December 11, 2016, Mr. Neuman informed Plaintiff that Borrower actually
had a payroll tax liability of $400,000.00. (Pl.’s Ex. 13; ECF No. 99, at 79:6–80:10.) He later
informed Rosenberg that as of January 2017, Borrower owed over one million dollars in
payroll taxes. (ECF No. 102, at 65:13–66:4.) Borrower’s 941s also show that Borrower became
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delinquent on its payroll taxes in the fourth quarter of 2016. (ECF No. 100, at 18:21–25, 19:12–
20; Pl.’s Exs. 19 & 20.)
This evidence is undisputed. At trial, Mr. Rosenberg admitted that there were unpaid
payroll taxes as of December 2016. (ECF No. 102, at 77:13-15.) Neuman also admitted that
payroll taxes were not paid on time. (ECF No. 100, at 19:23-20:9.) Defendants’ expert, Jared
Jordan, did not challenge Brian Young’s conclusions concerning the failure to pay payroll
withholding taxes. This fact in and of itself triggered the liability of Neuman and Rosenberg
as personal guarantors.
Nevertheless, in early December 2016, Borrower submitted a series of Borrowing Base
Certificates, each of which was signed by Neuman and certified that Borrower was current in
paying its payroll taxes. (ECF No. 99, at 78:9–19; ECF No. 102, at 77:16–79:1; ECF No. 100,
at 49:11-14; Pl.’s Ex. 15.6) As the evidence reveals, these representations were not true.
Rosenberg acknowledged this when he testified that some of the statements submitted in the
Borrowing Base Certificates were false. (ECF No. 102, at 79:20–23.) Although Capital
Finance was aware that Borrower was facing financial difficulty, it did not know that Borrower
was delinquent in paying payroll taxes until it received the Breslin Young report on December
9, 2016. (ECF No. 99, at 22:23-23:2.) In reliance on Neuman’s representations on the
Borrowing Base Certificates that Borrower was current on its payroll tax obligations, Capital
Finance advanced Borrower “in excess of a million” dollars in the weeks leading up to its
receipt of the field exam report. (ECF No. 99, at 78:20–79:5.)
6 Exhibit 15 is incorrectly identified as Exhibit 16 in the trial transcript at 78:9.
18
Between July 26, 2016 and September 30, 2016, Borrower submitted twenty Borrowing
Base Certificates, all signed by Neuman, which falsely certified that Borrower was in
compliance with the Credit Agreement. (Pl.’s Ex. 16; ECF No. 99, at 81:8-16.) Young
concluded, however, that Borrower had not paid $68,000 in provider taxes from July through
September 2016. (ECF No. 99, at 21:21–22:22.) He reached this conclusion based on
Borrower’s inability to provide any evidence of these payments. (Id. at 22:4-18.) Defendant’s
rebuttal expert, Jared Jordan, testified that Young should not have reached this conclusion
based on an absence of evidence. (ECF No. 100, at 93:6-93.) This lack of evidence, coupled
with Borrower’s admission that it could have provided this information had it existed, leads
this Court to conclude that Borrower had not paid provider taxes and misrepresented this fact
on Borrowing Base Certificates. (ECF No. 99, at 27:11-15, 32:18-20, 81:17–21; ECF No. 100,
at 19:19-22, 33:2-4, 41:4-7.) Had Capital Finance known that the provider taxes were not paid
in July 2016, it would have had a better chance of recovering on its loan. (ECF No. 99, at
82:14-17.)
The alarming revelations in the report spurred Capital Finance to action.
On
December 12, 2016, Capital Finance sent Borrower a notice of default, thereby accelerating
the payments of the loans, and demanded payment in full of the outstanding amounts due
under the Credit Agreement. (Pl.’s Ex. 5; ECF No. 99, at 82:18–25; ECF No. 100, at 54:1416.) On December 13, 2016, BenchMark became the new operator of Borrower. (ECF No.
101, at 37:16-18; 69:5-9).
B. Borrower, under the direction of Neuman, diverted IGT Payments from
DACA-controlled accounts.
19
On December 12, 2016, Capital Finance re-engaged Breslin Young to help reconcile
funds. (ECF No. 101, at 55:21-56:4). Pursuant to this engagement, Breslin Young provided
another report which revealed that IGT payments totaling $288,793.05 were wired to a Chase
account over which Plaintiff had no control. (ECF No. 101, at 57:24–59:9, 70:14–71:14;
Pl.’s Ex. 18, at CAPFI-445.) These highly suspicious wire transfers represented a marked
deviation from Borrower’s ordinary practice of depositing funds into the DACA-controlled
Banco Popular accounts through automated transfers. (ECF No. 101 58:19-24; Pl.’s Ex. 18,
at CAPFI-445.) The wire payments indicate that Neuman, the overseer of Borrower’s day-today activities and bank transfers, had deliberately diverted funds from their proper accounts.
Prior to this discovery, Capital Finance was not aware that Borrower was using Chase
for deposits of collateral. (ECF No. 99, at 62:8–11.) Subsequently, Plaintiff demanded
repayment of the funds. (Id. 59:10-18, 84:8-14.) Although Mr. Neuman acknowledged that
any funds not paid to the Banco Popular accounts were to be immediately remitted there,
Borrower only repaid $118,587.53 of the diverted funds. (ECF No. 100, at 56:8-57:9; ECF
No. 101, at 66:17–67:10; 67:10–11; Pl.’s Ex. 18 at CAPFI-454 & 456.)
On January 26, 2017, Plaintiff sent another letter to Borrower, addressed to Neuman,
demanding return of the remaining IGT payments. (Pl.’s Ex. 29; ECF No. 99, at 84:18–85:11.)
Neuman responded to Plaintiff confirming the funds had been sent to the Chase account and
did not dispute that the funds were IGT payments. (Pl.’s Ex. 14.) The remaining $170,205.52
of IGT payments was never repaid. (ECF No. 99, at 9:5–14, 86:10–14; Pl.’s Ex. 18, at CAPFI438.)
20
On June 20, 2017, Mr. Neuman and counsel for Borrower instructed a hospital to direct
$160,179.80 in IGT payments to Santander Bank, a non-DACA controlled account. (Pl.’s Ex.
22; ECF No. 99, at 92:18–93:7, 96:19-97:9; ECF No. 100, at 65:7-13.) The money was,
however, ultimately paid to Plaintiff. (ECF No. 102, at 4:16-5:1.) A show-cause order entered
by the United States District Court for the Northern District of Texas with respect to the
diversion attempt was resolved by Defendants paying money to Plaintiff. (ECF No. 100, at
64:23-65:5; 70:5-23.)
C. Borrower, under the direction of Neuman, diverted Medicare payments.
In 2016, $2,836,271.57 of Medicare payments were deposited into the Chase accounts.
(ECF No. 99, at 15:17-19; Pl.’s Ex. 18, at CAPFI-440.) Breslin Young could not trace any of
those payments being transferred to Capital Finance as required. (ECF No. 99, at 15:22-16:10.)
Between December 14, 2016 and January 26, 2017, $443,695 in Medicare payments were
deposited into Borrower’s Chase accounts. (ECF No. 99, at 9:21–10:17.) Upon discovery,
Breslin Young demanded return of the Medicare payments to Plaintiff. (Pl.’s Ex. 25, at CAPFI309; ECF No. 99, at 13:18–21.) On February 1, 2017, Borrower repaid $199,473.30 of diverted
Medicare funds to Plaintiff. (Pl.’s Ex. 18, at CAPFI-439; CAPFI-473-477.) No evidence
supports a finding that Plaintiff accepted this partial payment in lieu of full satisfaction of the
amounts owed.
The remaining $244,221.70 of diverted Medicare funds was never paid to Plaintiff or
accounted for by Borrower. (ECF No. 99, at 14:7–19, 90:5–11.) Mr. Neuman does not dispute
that Borrower’s failure to repay the remaining payments negatively impacted Plaintiff because
money would have gone to repay Borrower’s loan balance if the funds had been deposited in
21
the correct account. (ECF No. 99, at 14:20–15:1; ECF No. 100, at 46:5-9.) These repayments
were critical because no new accounts were generated by Borrower after December 12, 2016.
(ECF No. 99, at 39:16-40:5; ECF No. 102, at 58:17-59:2.)
VII.
Amounts Due to Agent and Lenders.
On June 8, 2018, Plaintiff demanded payment from Defendants under the guaranties.
(Pl.’s Ex. 6.) Prior to sending the letters, Plaintiff tried to exhaust its efforts to collect on
Borrower’s receivables before suing the individual guarantors. (ECF No. 99, at 91:20–92:13.)
As of January 8, 2019, the amounts outstanding to Plaintiff under the Credit Agreement are:
$575,705.65 in unpaid principle; $255,144.55 in default interest; $235,440.82 in legal fees
(excluding fees associated with this litigation); $173,359.88 for field exam work; and $65,080.47
for lenders’ monthly fees. (Pl.’s Ex. 23; ECF No. 99 101:10-103:16.) Interest, at the default
rate, continues to accrue on the unpaid balance at a per diem rate of $200.22. (Id.) Defendants
presented no challenge to these amounts at trial.
CONCLUSIONS OF LAW
The parties agree that Maryland law applies in this case. (ECF No. 101, at 51:3-6.)
Accordingly, this Court refers to Maryland law to resolve the breach of contract, fraud, and
conversion claims.
I.
Rosenberg and Neuman are liable for Breach of Contract under Counts III
and IV.
Under Counts III and IV, Capital Finance alleges that Rosenberg and Neuman are
liable for breach of the guaranty agreements by failing to pay the amounts owed under these
guaranties. (ECF No. 42, at ¶¶ 98, 106.) To prevail on a claim for breach of contract under
Maryland law, a party must prove the existence of a contractual obligation, a material breach
22
of that contractual obligation, and resulting damages. Kumar v. Dhanda, 198 Md. App. 337, 345,
17 A.3d 744 (2011). Rosenberg and Neuman are liable for breach of contract because
Borrower’s fraudulent misrepresentations on the Borrowing Base Certificates, as well as its
failure to pay payroll taxes, triggered liability under the guaranties. As Rosenberg and Neuman
have not satisfied their payment obligations under the guaranties, they are liable for breach of
contract.
A. Section 1(d) of the Guaranties must be read in the disjunctive.
In this case, Defendants Rosenberg and Neuman have based their defense on the
argument that all three events listed in Section 1(d) of their respective guaranties must have
occurred. It is undisputed that two of the three events—an involuntary bankruptcy and/or a
voluntary bankruptcy—did not occur. This results in the rather unique argument that
Rosenberg and Neuman were free to commit fraud or other illegal actions with no liability on
their personal guaranties. There is simply no basis for this Court to accept this strained and
illogical argument. The three events listed in Section 1(d) (i.e., involuntary bankruptcy,
voluntary bankruptcy, and fraud or other illegal actions) must be read in the disjunctive,
requiring only that the Borrower commit fraud or other illegal actions to trigger liability.
Under Maryland law, the interpretation of a contract is “ordinarily a question of law
for the court.” Kantsevory v. LumenR LLC, 301 F. Supp. 3d 577, 594-95 (D. Md. 2018)
(Hollander, J.) (quoting Grimes v. Gouldmann, 232 Md. App. 230, 235, 157 A.3d 331, 334-35
(2017) (citation and internal quotation marks omitted). “‘The cardinal rule of contract
interpretation is to give effect to the parties’ intentions.’” Dumbarton Imp. Ass'n Inc. v. Druid
Ridge Cemetery Co., 434 Md. 37, 51, 73 A.3d 224, 232 (2013) (alteration omitted) (quoting
23
Tomran, Inc. v. Passano, 391 Md. 1, 14, 891 A.2d 336, 344 (2006)). To determine the parties’
intentions, courts look first to the written language of the contract. Walton v. Mariner Health of
Maryland, Inc., 391 Md. 643, 660, 894 A.2d 584, 594 (2006) (“Generally, when seeking to
interpret the meaning of a contract our search is limited to the four corners of the
agreement.”).
As a first step in this analysis, this Court must “determine from the language of the
agreement what a reasonable person in the position of the parties would have meant at the
time the agreement was effectuated.” Hartford Acc. & Indem. Co. v. Scarlett Harbor Assocs. Ltd.
P'ship, 109 Md. App. 217, 291, 674 A.2d 106, 142 (1996), aff'd, 346 Md. 122, 695 A.2d 153
(1997). Critical to this inquiry in an examination of “the character of the contract, its purpose,
and the facts and circumstances of the parties at the time of execution.” CX Reinsurance
Company Limited v. Heggie, ELH-15-1674, 2016 WL 6025488, at *6 (D. Md. Oct. 14, 2016)
(quoting United Services Auto. Ass'n v. Riley, 393 Md. 55, 79, 899 A.2d 819, 833 (2006).
Moreover, this Court need not consult extrinsic evidence when, as here, a contract is
unambiguous. DIRECTV, 376 Md. at 312, 829 A.2d at 630 (citations omitted); see Clendenin
Bros. v. U.S. Fire Ins. Co., 390 Md. 449, 459, 889 A.2d 387, 393 (2006). “A written contract is
ambiguous if, when read by a reasonably prudent person, it is susceptible [to] more than one
meaning.” Calomiris v. Woods, 353 Md. 425, 436, 727 A.2d 358, 363 (1999) (citation omitted).
Maryland law recognizes that the word “and” may unambiguously require a disjunctive
reading in light of the character of the contract in which it appears. In Bankers & Shippers Ins.
Co. v. Urie, 38 Md. App. 232, 380 A.2d 243 (Md. Ct. Spec. App. 1977), the Maryland Court of
Special Appeals confronted a contract which insured an aircraft to be piloted by “Paul
24
Erickson and Wilford Goldman.” Bankers, 38 Md. App. at 234, 380 A.2d at 244. The
Defendant contended that the insurance policy should be read in the conjunctive to require
both Erickson and Goldman to be at the controls of the plane for the policy to apply. Id. at
248. The Court rejected this argument, finding no ambiguity in the contract. Id. The
conjunction “and” had “only one clear an unambiguous meaning to any reasonable person,
and that is that ‘and’ was used in the disjunctive sense to mean ‘or.’” Id. at 248. While a
conjunctive reading of the provision was certainly possible—there were dual controls, after
all—requiring both pilots to fly the plane would court disaster as they wrestled for control of
the vehicle. Id. The Court, mindful of the nature of the contract before it, refused to read it
in a manner which would encourage aviation catastrophes. See also Fidelity & Deposit Co. of
Maryland v. Mattingly Lumber Co., 176 Md. 217, 4 A.2d 447 (Md. 1939) (interpreting the word
“and” in a contractor’s bond to be in the disjunctive)
Conversely, the word “or” may require a conjunctive reading. An assignment contract
in Jeffrey Sneider-Maryland v. Mattingly Lumber Co., 282 Md. App. 229, 345 A.2d 79 (Md. Ct. Spec.
App. 1975) warranted that a “sewer is or will at settlement be available.” Id. at 231. When the
sewer was not available to service the property at the time of settlement, Sneider sued. Id. at
232. The lower court determined that it was proper to read this phrase in the disjunctive, such
that the availability of a sewer at the time of the Assignment satisfied the warranty provision
at issue. The Maryland Court of Special Appeals disagreed and found that a conjunctive
reading was more appropriate. Id. at 234. Examining the “plain meaning” of the contract’s
terms, and without resorting to extrinsic evidence, the Court determined that the agreement
contemplated that the sewer would be available at settlement, not merely at the time the
25
Assignment was executed. Id. at 240-41. A conjunctive reading, which would render the
warranty satisfied at the time it was made, would be “illogical.” Id. at 241.
Section 1(d) is not ambiguous and the Defendants’ argument would render their
personal guaranties meaningless. Considering the character of the guaranties and the context
in which they were entered, as Maryland case law requires, this provision must be read in the
disjunctive. As Mr. Stein testified, “bad boy” guaranties, like the one memorialized in Section
1(d), are widely used to “incentivize[] the principals of the borrower to act in accordance to
the credit agreement.” (ECF No. 99, at 70:20-23.) See also Credit Alliance Corp. v. Williams, 851
F.2d 119, 122 (4th Cir. 1988) (“The very purpose of a guaranty is the assure the [creditor] that
in the event that the [debtor] defaults, the [creditor] will have someone to look to for
reimbursement.”); CP III Rincon Towers, Inc. v. Cohen, 666 F. App’x 46, 49 n.1 (2d Cir. 2016)
(“bad boy guarantees . . . permit the lender to pursue the individual controlling the special
purpose borrower for actions that undermine the value of the lender’s collateral”). A bad boy
guaranty which remains unenforceable until Borrower engages in an implausible triad of
egregious conduct, any one of which would seriously inhibit the lender’s access to collateral,
does not provide this sort of incentive—it is not a guaranty at all.
Defendants have argued that all three events listed in Section 1(d) must occur for
liability to arise under the guaranties. Defendants maintain that this reading makes sense
because a single entity may undergo both voluntary and involuntary bankruptcy proceedings.
See, e.g., In re Caesars Entertainment Operating Company, Inc., 2015 WL 495259, at *2-3, 9 (Bankr.
D. Del.) (settling a venue dispute concerning a debtor who, faced with an involuntary
bankruptcy proceeding in Delaware, filed a voluntary bankruptcy petition in Illinois).
26
Moreover, because the term “Borrower” and “Credit Agent” are collective terms referring to
several entities and individuals, liability under the guaranties might arise if one Borrower
colludes to undergo an involuntary bankruptcy, another Borrower files for bankruptcy, and
one or both entities commit fraud.
Simply because Defendants’ reading is theoretically possible, however, does not mean
it is one that a reasonable person in the parties’ position would acknowledge. The Banker &
Shippers Defendant’s interpretation of the disputed contact was possible because the plane had
two sets of controls, and nothing prevented the Credit Alliance Defendant from making a
warranty about the status of the sewer at the time of assignment. Nevertheless, the Maryland
courts rejected these interpretations because they eschewed the purpose and character of the
contracts. This Court rejects Defendants’ strained interpretation. The purpose of a “bad boy”
guaranty is to discourage bad acts. The ones Rosenberg and Neuman signed were designed
to provide further assurances of proper conduct on behalf of the Borrower. An interpretation
of Section 1(d) which would permit Borrowers to commit flagrant acts of fraud completely
ignores the purpose of the guaranties and must be rejected.
Accordingly, Borrower’s
commission of fraud or other illegal acts triggers liability under the guaranties.
B. Borrower committed fraud and other illegal acts.
Rosenberg and Neuman are liable under the guaranties because Borrower engaged in
“fraud or other illegal action.” Defendants’ contract liability would arise had Borrower
committed any single act of fraud or illegal activity, but evidence at trial showed that Borrower
committed at least two such recurring acts, namely: (a) failing to pay payroll taxes; and (b)
committing fraud by submitting false Borrowing Base Certificates.
27
In Part II of its
Conclusions of Law, this Memorandum Opinion concludes that Neuman committed fraud by
submitting false Borrowing Base Certificates. As such, this Section will only discuss liability
arising from the Borrower’s undisputed failure to pay payroll taxes.
Mr. Neuman’s
commission of fraud, however, provides an additional basis for liability under the guaranty
agreements because Neuman acted in part as Borrower’s manager when he signed false
Borrowing Base Certificates.
It is clearly illegal to fail to pay payroll taxes. See 26 U.S.C. § 7202 (providing it is a
felony to fail to truthfully pay over any tax required to be collected under Title 26, which
includes 26 U.S.C. § 3404 (liability for employee withholding tax)). Under § 7202, willful
means a voluntary, intentional violation of a known legal duty. Cheek v. United States, 498 U.S.
192, 201 (1991). Bad faith or a bad purpose are not required to demonstrate a violation of this
law. See Cheek, 498 U.S. at 201 (requiring only “an intentional violation of a known legal duty”).
A person’s inability to pay the tax does not absolve him of criminal liability for failing to do
so. United States v. Lord, 404 F. App’x 773, 779 (4th Cir. 2010) (“paying wages and . . . satisfying
debts to creditors in lieu of remitting employment taxes to the IRS, constitute circumstances
evidence of a voluntary and deliberate violation of § 7202”).
Breslin Young’s analysis concluded that Borrower was delinquent in payment of
$251,000 in payroll taxes that should have been paid on November 10, 2016, November 17,
2016, and December 2, 2016. (ECF No. 99 19:7-25, 20:24–21:10, 33:5–11.) At trial, both
Defendants admitted that payroll withholding taxes were not paid. (ECF No. 102, at 77:1315; ECF No. 100, at 19:23-20:9.) By failing to pay payroll withholding taxes, Borrower violated
28
the law. Borrower’s persistent failure to meet its tax obligations was sufficient to trigger
liability under the bad boy guaranties.
C. Defendants have failed to meet their burden to prove any affirmative
defense.
Defendants bear the burden of proving an affirmative defense. Goodman v. Praxair, Inc.,
494 F.3d 458, 464 (4th Cir. 2007); CSX Transp., Inc. v. Pitts, 430 Md. 431, 449, 61 A.2d 767,
778 (Feb. 28, 2013). This Court finds that Defendant has failed to meet its burden on any
affirmative defense.
Many of Defendants’ affirmative defenses are explicitly foreclosed by the agreements
they signed. The “No Waiver” section of the Credit Agreement and the “Guaranty Absolute”
provision of the guaranties foreclose the affirmative defenses of equitable estoppel, waiver,
release, and laches. Additionally, Defendants cannot prevail on their claim that Plaintiff failed
to comply with Md. Code, Commercial Law §§ 9.625-626. Pursuant to Section 3 of the
guaranty, Defendants each agreed that Capital Finance need not collect against the Collateral
before collecting against each Defendant.
Moreover, the affirmative defenses of equitable estoppel and waiver required
Defendants to show that Capital Finance promised, by words or conduct, to forgo
enforcement of the contract. From the Heart Church Ministries, Inc. v. Philadelphia-Baltimore Annual
Conference, 184 Md. App. 11, 48-51, 964 A.2d 215, 237-239 (Md. Ct. Spec. App. 2009). Capital
Finance made no such representations. Even if Capital Finance made oral promises to work
with Defendants with respect to their defaults, these promises are unenforceable. Howard
Oaks, Inc. v. Maryland Nat’l Bank, et al., 810 F. Supp. 674, 676-677 (D. Md. 1993) (“any
29
assurances, oral and written, beyond the face of the loan documents, that bound MNB to
continue to fund Howard Oaks” were unenforceable promises even if not barred by statute)
(citing Phoenix Mut. Life Ins. Co. v. Shady Grove Plaza Ltd. Partnership, 734 F. Supp. 1181, 1186
(D. Md. 1990), aff’d. table, 937 F.2d 603 (4th Cir. 1991)).
Defendants’ asserted affirmative defense of accord and satisfaction fails because
Defendant did not demonstrate that Capital Finance agreed to accept only partial Medicare
and IGT payments. Johnson v. Xerox Educ. Sols. LLC, No. 0579, 2016 WL 4768866 (Sept. 13,
2016) (requiring an agreement between the parties for a party to accept a sum less than the
amount he claims is due). Although Capital Finance received partial payments of the
outstanding Medicare and IGT payments, nothing presented at trial indicated that Capital
Finance accepted these payments in lieu of the full amount owed to it.
Finally, Defendants’ unclean hands defense fails because they failed to present any
evidence of this claim at trial. Capital Finance’s mere awareness of Defendants’ difficult
financial situation does not indicate that it behaved inequitably by bringing this action.
D. Capital Finance is entitled to damages.
Accordingly, as a result of each, and any one, of Borrower’s illegal and fraudulent acts
described herein, Defendants are obligated, pursuant to Sections 1(a) and 1(d) of the
guaranties, to pay Plaintiff the Guaranty Obligations, which, exclusive of attorneys’ fees
incurred in this litigation, was proven at trial by Plaintiff to be $1,304,731.37 as of January 8,
2019. (Pl.’s Exs. 3 & 4, at §1(a), Pl.’s Ex. 23.) Interest, at the default rate, continues to accrue
on the unpaid balance at a per diem rate of $200.22 (Pl.’s Ex. 23.) Pursuant to Md. Code, Cts.
30
& Jud. Proc., § 11-107, Plaintiff is further awarded post-judgment interest at the rate of ten
percent (10%) per annum.
II.
Neuman is liable under Count V (Fraud).
A. Neuman is liable because he falsely claimed that Borrowers had paid payroll
taxes to obtain loans from Capital Finance.
To prevail on a claim of fraud under Maryland law, the plaintiff must show:
(1) that the defendant made a false representation to the plaintiff; (2) that its
falsity was either known to the defendant or that the representation was made
with reckless indifference as to its truth; (3) that the misrepresentation was made
for the purpose of defrauding the plaintiff; (4) that the plaintiff relied on the
misrepresentation and had the right to rely on it; and (5) that the plaintiff
suffered compensable injury resulting from the misrepresentation.
Alia Salem Al-Sabah v. Jean Agbodjogbe, et al., ELH-17-730, 2019 WL 198982, at
*7-8 (D. Md. Jan. 14, 2019) (quoting Nails v. S&R, Inc., 334 Md. 398, 415, 639 A.2d
660, 668 (1994). These five elements must be proven by clear and convincing evidence.
Md. Envtl. Trust v. Gaynor, 370 Md. 89, 97, 803 A.2d 512 (2002).
The evidence presented at trial clearly shows that Neuman made false representations,
with at least reckless indifference as to their truth, to defraud Capital Finance. On Borrowing
Base Certificates dated December 6, 7, and 8, 2016, Neuman represented that Borrower was
in compliance with the Credit Agreement and that it had paid all payroll withholding taxes.
(Pl.’s Ex. 15.) At that time, however, Borrower had not paid payroll taxes. Rosenberg
admitted that payroll taxes were not paid as of December 2016; Neuman similarly admitted
that payroll taxes were not paid on time. (ECF No. 102, at 77:13-15; ECF No. 100, at 19:2320:9.)
Moreover, on December 11, 2016 Neuman informed Capital Finance that Borrower
had a payroll tax liability of $400,000.00. (Pl.’s Ex. 13; ECF No. 99 79:6-80:10.) This
31
representation, made just days after executing the Borrowing Base certificates, is among the
vast evidence from which this Court finds that Neuman knew that the statements on the
Borrowing Base Certificates were false when he signed and submitted them.
Although Mr. Neuman testified that he did not read the language printed on the onepage Borrowing Base Certificates (ECF No. 100, at 53:6-9.), this Court finds this claim—and
much of his testimony—unworthy of credence. First, Mr. Neuman showed a serious lack of
credibility by providing evasive answers and contradicting his deposition testimony. In
response to the question, “[Y]ou don’t deny that the statements contained in these borrowing
base certificates, Plaintiff’s Exhibit 15, are false; right?” Mr. Neuman claimed the inability to
understand the question. (ECF No. 100, at 50:1-51:16.) He quibbled with the definition of
“accounts receivable,” an uncontroversial accounting term. (ECF No. 100, at 45:4-17.) He
testified at trial that he did not personally authorize every disbursement out of the Borrower
accounts, but at his deposition he agreed that he was “authorizing every disbursement” and
signed off on disbursals as small as $75.00. (ECF No. 100, at 46:10-47:4.)
Second, Mr. Neuman is a sophisticated businessman with years of experience in the
healthcare industry. The sum of his testimony indicates that he knew that he had to make
representations about the Borrower’s financial health before obtaining additional loans from
Capital Finance. This Court finds that, to the extent Mr. Neuman did not read the Borrowing
Base Certificates, he failed to do so with a reckless disregard for the content of his statements.
Finally, Mr. Neuman signed the same one-page form throughout the life of the loan.
His claim that he never paused to examine its averments at the very least demonstrates a
32
grossly irresponsible, reckless indifference to the truth. Under Maryland law, signatories to a
contract are expected to read their terms. See Danner, v. Int'l Freight Sys. of Washington, LLC,
ELH-09-3139, 2013 WL 78101, at *19 (D. Md. Jan. 4, 2013) (finding that one cannot accept
a contract and then renege based on one’s own failure to read it).
Capital Finance relied on the misrepresentations in the Borrowing Base Certificates
and suffered compensable injury stemming from these misrepresentations. Although Capital
Finance was aware that Borrower faced financial difficulties, it was not aware that Borrower
had failed to pay payroll taxes. Mr. Stein testified that the failure to pay payroll taxes would
raise “red flags” and that Capital Finance would not have provided additional loans had it
known that Borrower had failed to meet its tax obligations. (ECF No. 99, at 53:1–5.) Instead,
Capital Finance relied on Borrower’s representations and decided to advance at least
$1,000,000.00 to Borrower. (ECF No. 99, at 78:20–79:5.)
Finally, the exculpatory provision in the form borrowing certificates attached to the
Credit Agreement do not prohibit Plaintiffs from pursuing fraud against Neuman. While the
form Borrowing Base Certificates state that the signatory “shall not have any persona liability
for the statements made in this Certificate, all such recourse being limited to Borrower,” the
parties did not use this form. (Pl.’s Ex. 1, at CAPFI-109.) Instead, the parties used Borrowing
Base Certificates that did not include this language. Moreover, Maryland law prohibits parties
from contracting out of fraud. See Wolf v. Ford, 335 Md. 525, 537 (1994) (observing that an
exculpatory clause in an investment contract was invalid insofar as it attempted to disclaim
liability for fraud).
33
B. Capital Finance is entitled to actual damages, plus pre- and post-judgment
interest, and punitive damages.
This Court may only award damages which flow from the “natural, proximate and
direct effect” of Neuman’s fraudulent misrepresentations. Call Carl, Inc. v. BP Oil Corp., 554
F.2d 623, 631 (4th Cir. 1977). In determining the “proper measure of damages in fraud and
deceit cases,” Maryland applies the “flexibility theory,” under which a victim of fraudulent
misrepresentation may elect to recover either out-of-pocket expenses or benefit-of-thebargain damages. SG Homes Assocs., LP v. Marinucci, 718 F.3d 327, 336 (4th Cir. 2013) (quoting
Hinkle v. Rockville Motor Co., 262 Md. 502, 278 A.2d 42, 47 (1971)). The former permits a
plaintiff to recover his or her actual losses; the latter puts the plaintiff in the same financial
position as if the fraudulent representation had in fact been true. SG Homes, 718 F.3d at 336
(citing Goldstein v. Miles, 159 Md.App. 403, 859 A.2d 313, 324 (2004); see also Buie v. Sys.
Automation Corp., 918 F.2d 955, 1990 WL 180126, at *11 (4th Cir.1990) (Table) (benefit-ofthe-bargain damages may be employed only in “appropriate cases”).
Due to its reliance on Neuman’s fraudulent misrepresentations in the Borrowing Base
Certificates, Plaintiff loaned at least $1,000,000.00 to Borrower. (ECF No. 99, at 78:20–23;
78:24–79:5.)
Plaintiff seeks to recover this entire amount as damages—an amount
representing its claimed actual losses. As previously discussed, however, only $575,705.65 in
principle remains outstanding. Accordingly, this Court will award actual damages in the
amount of $575,705.65. Post-judgment interest shall be awarded at the rate of ten percent
(10%) per annum in accordance with Md. Code, Cts. & Jud. Proc., § 11-107.
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Plaintiff additionally seeks prejudgment interest in the amount of six percent (6%) per
annum. Following a bench trial, the district court has discretion to award prejudgment interest
at a rate of six percent (6%). Crystal v. West & Callahan, Inc., 328 Md. 318, 342, 614 A.2d 560,
572 (1992). Prejudgment interest is appropriate when the amount due has become certain,
definite, and liquidated prior to judgment. David Sloane, Inc. v. Stanley G. House & Assocs., Inc.,
311 Md. 36, 53-54, 532 A.2d 694, 702 (1987) (citation omitted). In this case, prejudgment
interest is appropriate because Capital Finance loaned a sum certain proved at trial to be no
greater than $1,000,000.00 in reliance on Neuman’s fraudulent misrepresentations.
Accordingly, this Court shall award prejudgment interest of six percent (6%) per annum.
Plaintiff additionally seeks $1,000,000.00 in punitive damages against Neuman. Under
Maryland law, an award of punitive damages is appropriate if the defendant acted with “actual
malice,” which is “conscious and deliberate wrongdoing, evil or wrongful motive, intent to
injure, ill will, or fraud.” Bowden v. Caldor, Inc., 350 Md. 4, 23, 710 A.2d 267, 276 (1998)
(internal quotation marks omitted). In the case of a claim for intentional misrepresentation,
“the defendant’s actual knowledge of falsity, coupled with his intent to deceive the plaintiff by
means of the false statement, constitutes the actual malice required to support an award of
punitive damages.” Ellerin v. Fairfax Sav., F.S.B., 337 Md. 216, 234, 652 A.2d 1117, 1126 (1995).
This state of mind must be proven by clear and convincing evidence. Scott v. Jenkins, 345 Md.
21, 29, 690 A.2d 1000 (1997).
The evidence demonstrates that Neuman represented that Borrower had paid payroll
taxes, knowing that it had not, with the intent of obtaining additional loan advances from
Capital Finance. His testimony that he did not read the Borrowing Base Certificates, which
35
contained these representations, is not credible. Neuman knew that the statements on these
documents were false but certified to them anyway, certain that the Borrower’s failure to pay
payroll withholding taxes would raise “red flags” and cause Capital Finance to stop advancing
funds. Accordingly, this Court will assess a punitive damages award.
Punitive damages should aim to “deter the wrongdoer and others from engaging in the
same misconduct.” Alexander & Alexander, Inc. v. B. Dixon Evander & Assocs., 88 Md. App. 672,
596 A.2d 687 (Ct. Spec. App. 1991), cert. denied, 323 Md. 1, 590 A.2d 158 (1991) (subsequent
history omitted). The amount should also be calibrated “to the gravity of the defendant’s
conduct” and should “not be disproportionate to . . . the defendant’s ability to pay.” Bowden v.
Caldor, Inc., 350 Md. 4, 27-28, 710 A.2d 267, 278 (1998) (quoting Ellerin, 337 Md. at 242, 652
A.2d at 1130). This Court finds that punitive damages in the amount of $200,000.00 will
achieve these objectives.
V.
Neuman is liable under Count VI (Conversion).
A. Josef Neuman committed the tort of conversion by diverting IGT payments and
Medicare funds from DACA-controlled accounts to accounts at JP Morgan
Chase.
The intentional tort of conversion consists of two elements: “a physical act combined
with a certain state of mind.” Neal v. Pentagon Federal Credit Union, ELH-18-451, 2018 WL
5786119, at *19 (D. Md. Nov. 5, 2018) (quoting Darcars Motors of Silver Spring, Inc. v. Borzym,
379 Md. 249, 261, 841 A.2d 828, 835 (2004). The physical act requires “any distinct act of
ownership or dominion exerted by one person over the personal property of another in denial
of his right or inconsistent with it.” Neal, 2018 WL 5786119, at *19 (quoting Darcars, 379 Md.
at 261, 841 A.2d at 835). For the intent element, “an intent to exercise a dominion or control
36
over the goods which is in fact inconsistent with the plaintiff’s rights” will suffice. Neal, 2018
WL 5786119, at *19 (quoting Keys v. Chrysler Credit Corp., 303 Md. 397, 414, 494 A.2d 200, 208
(1985)). This element is satisfied even if the Defendant “acted in good faith and lacked any
consciousness of wrongdoing.” Neal, 2018 WL 5786119, at *19 (quoting Darcars, 379 Md. at
262, 841 A.2d at 836).
Although money is generally not subject to conversion claims, an exception exists for
discrete, identifiable sums that have been diverted from their proper destination. See, e.g.,
Roman v. Sage Title Group, 146 A.3d 479 (Md. App. 2016) (determining that “funds that have
been or should have been segregated for a particular purpose or that have been wrongfully
obtained or retained or diverted in an identifiable transaction” are subject to conversion claims
(quoting Allied Investment Corp. v. Jasen, 354 Md. 547, 564-65, 731 A.2d 957 (1999))).
Plaintiff has demonstrated that Neuman committed the tort of conversion by diverting
IGT and Medicare payments from the DACA controlled Banco Popular accounts to Chase
and Santander bank accounts. As more fully described in this Court’s findings of facts, he
intentionally diverted Medicare payments throughout 2016 and then again between December
2016 and January 2017. (ECF No. 99, at 9:21–10:17, 15:17-19; Pl.’s Ex. 18, at CAPFI-440.)
Through a series of wire transfers, he diverted IGT payments from their proper destination.
(ECF No. 101 58:19-24; Pl.’s Ex. 18, at CAPFI-445.) These diversions deprived Capital
Finance of discrete sums to which it had a legal interest and put Capital Finance “in a worse
position” when it attempted to enforce its contract. (ECF No. 100 46:5–9.)
B. Capital Finance is entitled to actual damages, plus pre- and post-judgment
interest.
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Capital Finance sustained actual damages of $170,205.52 (the missing IGT payments)
and $244,221.70 (the unpaid Medicare funds), for a total of $414,427.22. Under Maryland law,
the measure of damages for conversion is limited to “the market value of the chattel at the
time and place of conversion plus interest to the date of judgment.” Staub v. Staub, 37 Md.
App. 141, 145, 376 A.2d 1129, 1133 (1977). Accordingly, Neuman is liable to Capital Finance
in the amount of $414,427.22. Additionally, this Court will exercise its discretion to award
Capital Finance pre-judgment interest at the rate of six percent (6%) per annum. Postjudgment interest at the rate of ten percent (10%) per annum will also be assessed. Md. Code,
Cts. & Jud. Proc., § 11-107.
CONCLUSION
Having conducted a two-day bench trial on January 9, 2019 and January 10, 2019, heard
eyewitness and expert witness testimony, considered documentary evidence submitted by the
parties, heard the parties’ legal arguments, and reviewed the parties’ Proposed Findings of Fact
and Conclusions of Law, this Court concludes as follows.
1. By submitting false Borrowing Base Certificates to obtain loan advances, Neuman
committed fraud and caused Capital Finance to incur 575,705.65 in actual damages.7
Plaintiff is further awarded pre-judgment interest at the rate of six percent (6%) per
annum and post-judgment interest at the rate of ten percent (10%) per annum.
Punitive damages are warranted in the amount of $200,000.00.
2. Neuman diverted IGT payments and Medicare payments from the DACA-controlled
accounts at Banco Popular, causing Borrower actual damages of $414,427.22.8 Plaintiff
7 This amount is included in, and therefore duplicative of, the total amount owed under the guaranty
agreements.
8 This amount is included in, and therefore duplicative of, the total amount owed under the guaranty
agreements.
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is awarded pre-judgment interest at the rate of six percent (6%) per annum and postjudgment interest at the rate of ten percent (10%) per annum.
3. Rosenberg and Neuman are obligated to pay Capital Finance the outstanding
obligations under the Guaranty agreements. As of January 8, 2019 that amount is
$1,304,731.37, representing the sum of $575,705.65 in unpaid principle; $255,144.55 in
default interest; $235,440.82 in legal fees (excluding fees associated with this litigation);
$173,359.88 for field exam work; and $65,080.47 for lenders’ monthly fees. Interest,
at the default rate, continues to accrue on the unpaid balance at a per diem rate of
$200.22. Plaintiff is further awarded post-judgment interest at the rate of ten percent
(10%) per annum.
4. Judgment shall be ENTERED in favor of Capital Finance on Counts III and IV
(Breach of Contract); Count V (Fraud); and Count VI (Conversion).
5. Rosenberg and Neuman SHALL PAY to Capital Finance a total of $1,304,731.37.
6. Neuman SHALL PAY to Capital Finance $200,000.00 in punitive damages, over and
above the total amount of $1,304,731.37.9
A separate order follows.
January 23, 2019
_____/s/____________________
Richard D. Bennett
United States District Judge
Finance seeks an award of attorney’s fees. The proper procedure for requesting attorney’s fees is to file a
Motion within fourteen (14) days of the entry of judgment, as described in Local Rule 109.2(a)-(b) (D. Md. 2018).
9 Capital
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