1621 Coit Road Realty LLC et al v. Midwest TX Realty LLC et al
MEMORANDUM OPINION AND ORDER denying 40 Emergency MOTION to Compel Filing of "CHOW" Applications By Plaintiffs With the Applicable State Regulatory Agencies, or Alternatively, to Amend the Court's December 12, 2016 Order and For a Grant of Related Relief filed by Midwest TX Realty LLC. (Ordered by Judge Sidney A Fitzwater on 1/18/2017) (Judge Sidney A Fitzwater)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
1621 COIT ROAD REALTY LLC et al., §
§ Civil Action No. 3:16-CV-3337-D
MIDWEST TX REALTY LLC et al.,
In this contract dispute between the owners of healthcare facilities and their lessee,
the lessee has filed an emergency motion to compel filing of “CHOW” applications by
plaintiffs with the applicable state regulatory agencies, or, alternatively, to amend the court’s
December 12, 2016 order and for a grant of related relief. For the reasons that follow, the
court denies the motion.
Plaintiffs1 are the owners-lessors of eight healthcare facilities located on four
properties. Defendant Midwest TX Realty LLC (“Midwest”) is the lessee of these facilities.
Defendants Josef Neuman (“Neuman”) and Oscar Rosenberg (“Rosenberg”) are managers
of Midwest and guarantors of Midwest’s obligations to plaintiffs.
Each of the four properties leased by plaintiffs to Midwest contains a skilled nursing
Plaintiffs are 1621 Coit Road Realty LLC, 5601 Plum Creek Drive Realty LLC, 2301
North Oregon Street Realty LLC, and 8200 National Avenue Realty LLC.
facility and a long-term acute-care hospital. Midwest, in turn, subleases the facilities to
operating companies. Three properties are located in Texas, and one is located in Oklahoma.
The contractual relationship between plaintiffs and Midwest is governed by a Master
Lease. The Master Lease requires Midwest to pay rent to plaintiffs monthly. The Master
Lease also obligates Midwest to continuously operate the facilities as skilled nursing
facilities and long-term acute-care hospitals. Under the Master Lease, failing to pay rent or
ceasing operations at the facilities are events of default. The Master Lease contains agreed
remedies for default, including appointment of a manager/consultant, appointment of a
receiver, or retaking possession.
Midwest ceased operations at two of the long-term acute-care facilities in October
2016. It failed to pay a portion of its November rent, as required by the Master Lease,
attributing the shortfall to the two closed facilities. Plaintiffs then filed the instant lawsuit,
seeking (i) a temporary restraining order (“TRO”) that restrained Midwest from ceasing
operations at any other facilities, (ii) appointment of a manager/consultant to manage all
facilities subject to the Master Lease, and (iii) a constructive trust on any monies received
by Midwest from operation of properties subject to the Master Lease.
The court granted a TRO restraining defendants from ceasing operations at any other
facilities, and carried (i.e., deferred a decision on) the other requests for relief pending a
ruling on plaintiffs’ motion for a preliminary injunction. Despite the entry of the TRO,
Midwest closed a third facility, citing a loss of pharmacy service, and informed the court by
letter of its decision. In the same letter to the court, Midwest also stated that it expected to
imminently discharge the patients at a fourth facility, due to payroll and vendor payment
Soon after these developments, plaintiffs, inter alia, renewed their motion for
appointment of a manager/consultant.
The court appointed Benchmark Healthcare
Consultants, LLC (“Benchmark”) as a manager/consultant, with authority to
(i) assist Midwest in curing any breaches under the Master
Lease, (ii) assist Midwest in maintaining and preserving the
operation of the businesses and the value of the assets located at
the Property (as defined in the Master Lease), and (iii) carry out
all functions as a manager of the Property, including, but not
limited to, the authority to access the books and records related
to the Property (including all billing, payroll, vendor, resident,
and other information related to the operation of the businesses
on the Property) as well as the right to control the finances, bank
accounts, and other assets related to the Property, to obtain full
cooperation from Midwest related to operation of the Property,
to enter into, terminate, and amend contracts for services
rendered to the facilities and residents, and to manage and
receive all revenues, earnings, income, products, and profits
from the operation of the Property.
Dec. 12, 2016 Order 2. Once appointed as manager/consultant, Benchmark took action to
continue operations at the facilities. Benchmark retained the facilities’ policies relating to
patient care and also retained most of the employees who were already in place at the
facilities. Benchmark caused the operating companies to form new contracts with vendors
as needed to sustain operations at the facilities.
Midwest’s secured lender—intervenor Capital Finance LLC (“Capital Finance”)—
terminated Midwest’s credit on the day Benchmark was appointed. Plaintiffs then began
funding operations at the facilities themselves. Benchmark, as manager/consultant, directed
funds to the operating companies’ existing accounts so that outstanding payroll and vendor
checks would clear. Benchmark later began directing funds to new accounts that were
established in the names of the operating companies.
Midwest’s books and records show that it currently owes Capital Finance “less than
$3.9 million.” Midwest Reply App. 4. Midwest’s books and records also indicate that its
receivables attributed to the period prior to December 13 (prior to arrival of the
manager/consultant) are at least $6 million. For these reasons, Midwest maintains that
Capital Finance is oversecured. Benchmark and plaintiffs have not provided a financial
accounting to Midwest since the appointment of the manager/consultant, but they have
agreed to provide financial statements that account for the receivables in question within 90
days after the close of the quarter to which they relate.
Midwest has counterclaimed for a declaratory judgment establishing that the Master
Lease was terminated as of the date the manager/consultant entered the facilities, and for a
declaratory judgment establishing that a change in ownership of the facilities had occurred.
In the instant motion, Midwest asks the court to compel plaintiffs to file change of ownership
(“CHOW”) applications with Texas and Oklahoma regulatory agencies, or, alternatively, to
expand the scope of Benchmark’s appointment to make Benchmark a receiver, which
Midwest contends would automatically trigger the need for CHOW applications. Midwest
also moves for an accounting of all collections since December 12, 2016 that are attributable
to operations of the facilities prior to Benchmark’s appointment. Neuman and Rosenberg
have joined Midwest’s motion. Plaintiffs oppose the motion.
Midwest acknowledges that its motion to compel plaintiffs to file CHOW applications
is the equivalent of a motion for permanent injunction. Midwest Br. 9 n.6. Were Midwest
seeking a preliminary injunction, it would be required to establish each of the following: (1)
a substantial likelihood that it will prevail on the merits; (2) a substantial threat that it will
suffer irreparable injury if the injunction is not granted; (3) that the threatened injury to
Midwest outweighs the threatened harm the injunction may do to plaintiffs; and (4) that
granting the preliminary injunction will not disserve the public interest. See, e.g., Jones v.
Bush, 122 F.Supp.2d 713, 718 (N.D. Tex. 2000) (Fitzwater, J.), aff’d, 244 F.3d 134 (5th Cir.
2000) (per curiam) (unpublished table decision). “Where a plaintiff seeks permanent
injunctive relief, the test is the same, except that ‘the movant must show actual success on
the merits of the claim, rather than a mere likelihood of such success.’” Caroline T. v.
Hudson Sch. Dist., 915 F.2d 752, 755 (1st Cir. 1990) (quoting K-Mart Corp. v. Oriental
Plaza, Inc., 875 F.2d 907, 915 (1st Cir. 1989)). Midwest acknowledges that this higher
burden of “actual success on the merits” applies to its motion. Midwest Br. 9 n.6. “[T]he
decision whether to grant or deny injunctive relief rests within the equitable discretion of the
district courts, and . . . such discretion must be exercised consistent with traditional principles
of equity.” eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 394 (2006).
The court considers first whether Midwest has demonstrated actual success on the
merits of its counterclaim for declaratory judgment with respect to the change of ownership
of the facilities. Midwest contends that it is likely to succeed on its declaratory judgment
counterclaim because such an action is intended to provide an early adjudication of a
controversy for which there would be no other satisfactory remedy—in the instant case, a
controversy over whether a change in ownership or control has occurred. Midwest maintains
that the appointment of the manager/consultant should be considered to be a change in
ownership because it would be unacceptable for the States of Texas and Oklahoma to have
no recourse over the entity that actually operates a healthcare facility.
Midwest also supports its merits contention with the argument that Texas law requires
a license to operate an assisted living facility, and the license is not transferable. See 40 Tex.
Admin. Code §§ 19.201, 19.210(a) (2012). Midwest therefore maintains that a transfer in
ownership or control of a facility must be accompanied by a CHOW application if it is to
comply with Texas healthcare law, see id. § 19.210(a)(5)(C) (2012), and that Oklahoma law
is effectively similar.
Defendants Neuman and Rosenberg also separately argue that the manager/consultant
has exceeded its contractual authority and is therefore more like a new owner or a receiver
than a mere manager. Neuman and Rosenberg maintain that the Master Lease contemplates
a manager/consultant with authority only to assist Midwest in curing breaches of the Master
Lease and receive certain funds. They argue that broader powers fall under the receiver
remedy that is separately enumerated in the Master Lease. See Master Lease § 20.6.
In response to Midwest’s motion, plaintiffs emphasize that Midwest has not
established actual success on the merits of its counterclaims, as required for relief that
Midwest acknowledges is the equivalent of a motion for a permanent injunction. Plaintiffs
contend that, not only has the court neither imposed judgment nor concluded a trial, but
plaintiffs have not even answered the counterclaims or conducted any discovery; Midwest’s
motion is not supported by any evidence, and relies instead on unsupported assertions
(although Midwest later submitted a reply appendix); Midwest cannot prevail on its
counterclaims as a matter of law; only a change of ownership, not a change of management,
requires CHOW applications for new licenses to be filed; and providing management
services is separate from the role of owning or operating a healthcare facility. Plaintiffs also
maintain that, because the manager/consultant in this case has only provided management
services, not owned or operated the facilities, no change of ownership applications are
required. Plaintiffs agree with Midwest that Texas and Oklahoma law are substantively
similar in this respect.
“A permanent injunction is generally only granted where . . . a full trial on the merits
has occurred.” ITT Educ. Servs., Inc. v. Arce, 533 F.3d 342, 347 (5th Cir. 2008); see GE
Capital Commercial, Inc. v. Wright & Wright, Inc., 2009 WL 5173954, at *9 (N.D. Tex. Dec.
31, 2009) (Lindsay, J.) (holding that actual success on merits cannot be shown until judgment
as a matter of law is imposed or party prevails at trial). The court concludes that Midwest
has not carried its burden to demonstrate actual success on the merits, because Midwest has
not obtained a judgment as a matter of law or prevailed at trial. See ITT Educ. Servs., 533
F.3d at 347.
The court turns next to the requirement that Midwest establish a threat of irreparable
injury. Midwest contends that the status quo threatens it with two forms of irreparable injury.
First, Midwest posits that it is subjected to liability for acts that it cannot control if the
manager/consultant exercises authority over the facilities while Midwest holds the licenses.
Midwest maintains that third-party lawsuits brought by patients or former patients could
unjustly subject it to liability as long as it holds the licenses while the manager/consultant
makes operational decisions.
Second, Midwest contends that it is likely to suffer irreparable injury because its
licenses may be revoked due to acts or omissions of the manager/consultant, thereby injuring
its goodwill and business opportunities.
Plaintiffs respond that Midwest’s alleged threats of irreparable harm are too
speculative to support a permanent or preliminary injunction. They maintain that the
possibility that Midwest might be sued is not an irreparable harm. And they contend that
“[e]ven if Midwest were sued and found liable and could establish that ‘change of
ownership’ applications would have relieved it of that liability . . . then it still would have a
complete and adequate damages remedy in the amount of any judgment against it.” Ps. Br.
17 (emphasis omitted).
And as to Midwest’s second ground—the revocation of
licenses—plaintiffs maintain that this risk is merely speculative, and that Midwest has not
presented evidence suggesting how a license revocation would irreparably harm Midwest’s
business interests. Plaintiffs also argue that the manager/consultant was put in place largely
to preserve the licenses, which Midwest seemed prepared to forfeit by closing the facilities,
and that the manager/consultant has reduced the risk of seeing the licenses revoked.
“A party seeking a permanent injunction must also plead and prove an irreparable
injury for which no adequate remedy at law exists.” Dresser-Rand Co. v. Virtual Automation
Inc., 361 F.3d 831, 847-48 (5th Cir. 2004). “Speculative injury is not sufficient; there must
be more than an unfounded fear on the part of the applicant.” Holland Am. Ins. Co. v.
Succession of Roy, 777 F.2d 992, 997 (5th Cir. 1985). The court concludes that Midwest has
not established that it is likely to suffer irreparable injury in the absence of an injunction,
because threats to Midwest from third-party lawsuits are likely to be compensable by
damages, and threats from revocation of the licenses have not been established beyond
The court now turns to the balance between the threatened injury to Midwest and the
possible injury to plaintiffs from granting an injunction.
Midwest contends that, as the case now stands, the risks of injury are unfairly
distributed, because plaintiffs receive the benefits of operating the facilities but shoulder
none of the burdens, considering that all regulatory and third-party litigation risks reside with
the party holding the licenses. Midwest posits that the relief requested in its motion would
better balance the hardships.
Plaintiffs respond that the balance of equities weighs against granting Midwest’s
motion. They maintain that they currently bear the burden of financing operations at the
facilities, in addition to settling past-due bills associated with the time before the appointment
of the manager/consultant. Plaintiffs also contend that they are in contact with potential new
sublessors who are interesting in taking over operation of the facilities, and that, if they are
ordered to file CHOW applications, the regulatory uncertainty would interfere with their
efforts to find a long-term solution for the facilities.
The court concludes that Midwest has not met its burden to establish that the
threatened injury to Midwest outweighs the threatened harm that granting the motion may
do to plaintiffs. Midwest’s threatened injury remains speculative and not established by
evidence, and thus cannot be determined to outweigh potential harms to the plaintiffs. See
supra § III(B).
The court now considers whether Midwest has shown that granting its motion will not
disserve the public interest.
Midwest contends that public policy favors the relief it seeks because state regulatory
regimes require the operators of healthcare facilities to be licensed, and the licenses must be
reapplied for when a transfer of ownership occurs. It also maintains that the public policy
of contract enforcement favors granting relief, because plaintiffs have overstepped the
manager/consultant remedy available through the Master Lease. Midwest argues that relief
recognizing that the manager/consultant is a de facto change of ownership would not disserve
the public interest.
Plaintiffs respond that the public policy of contract enforcement weighs against
granting relief to Midwest. They contend that it is in the public interest to uphold contracts
and to enforce a remedy to which the parties have expressly agreed; that by moving for
appointment of the manager/consultant, they exercised a right to select among their
contractual remedies under the Master Lease; that to grant the relief Midwest seeks would
be to place plaintiffs in a situation that they did not elect, in which Midwest is declared out
of possession; and that granting the relief Midwest seeks improperly abridges the rights that
plaintiffs bargained for under the Master Lease.
The court concludes that Midwest has not carried its burden to establish that the relief
it seeks would not disserve the public interest. The record and arguments do not establish
that the manager/consultant has acted beyond the terms that Midwest agreed to under the
Master Lease, and for this reason the policy of contract enforcement does not weigh in
Midwest’s favor. And healthcare licensing policy has not been shown to weigh in Midwest’s
favor because Midwest has not established under the higher permanent injunction standard
that appointment of a manager/consultant should be considered a change of ownership under
Texas or Oklahoma law. See supra § III(A).
Because Midwest has not established the required elements for a permanent
injunction, the court concludes that Midwest is not entitled to an order compelling plaintiffs
to file CHOW applications.
Midwest alternatively moves the court to amend its order appointing Benchmark as
a manager/consultant and instead appoint Benchmark as a receiver. Midwest contends that
Fed. R. Civ. P. 60(b)(3) permits the court to amend an order for fraud, misrepresentation, or
And Midwest appears to argue that Benchmark’s conduct as
manager/consultant satisfies one of the Rule 60(b)(3) criteria because Benchmark and
plaintiffs have exceeded the scope of the court’s December 12, 2016 order. Midwest
maintains that a receivership would be preferable to the status quo and would trigger the
filing of CHOW applications.
Plaintiffs respond that Rule 60(b)(3) provides for relief only in cases where it is
established by clear and convincing evidence that fraud or other misconduct prevented a
party from fully and fairly presenting its case. Plaintiffs maintain that Midwest has not
offered evidence to support any allegation of fraud or misconduct. They contend that
Midwest has not even alleged that it was prevented from fully and fairly presenting its case
prior to the court’s December 12, 2016 order appointing the manager/consultant.
The court concludes that Midwest is not entitled to Rule 60(b)(3) relief. See United
States v. City of New Orleans, 731 F.3d 434, 442 (5th Cir. 2013) (holding that Rule 60(b)(3)
movant must establish, by clear and convincing evidence, fraud or misconduct that prevented
it from presenting its case).
Midwest also moves for an accounting of all collections since December 12, 2016 that
are attributable to operations of the facilities prior to Benchmark’s appointment. Midwest
contends that its former secured lender (Capital Finance) is oversecured, and that, as a result,
some accounts controlled by the manager/consultant may contain funds to which Midwest
is ultimately entitled.
Midwest contends that Capital Finance is oversecured by
approximately $2 million, and that Midwest has not received information about these
accounts. Midwest is also concerned that overpayments may have been made to Capital
Plaintiffs respond that, in accordance with the Master Lease, the manager/consultant
is not obligated to provide Midwest an accounting. They contend that the only pertinent
contractual obligation is for Midwest itself to maintain accurate books and records, and to
make them available to plaintiffs. See Master Lease § 32.6. Plaintiffs also posit that
Midwest is not entitled to an accounting under equitable principles. They maintain that,
under Texas law, an equitable accounting is only proper “when the facts and accounts
presented are so complex adequate relief may not be obtained at law.” T.F.W. Mgmt., Inc.
v. Westwood Shores Prop. Owners Ass’n, 79 S.W.3d 712, 717 (Tex. App. 2002, pet. denied).
Plaintiffs also contend that, when standard discovery procedures are adequate for a party to
obtain adequate relief, the party is not entitled to an accounting. See id. at 717-18.
The court concludes that Midwest has not shown that it is entitled to an accounting
because it has not established that the accounts in this case are so complex that standard
discovery procedures would be inadequate, and has not cited any authority supporting an
accounting in circumstances like those present here. See id.
Accordingly, for the reasons explained, Midwest’s December 22, 2016 emergency
motion to compel filing of CHOW applications by plaintiffs with the applicable state
regulatory agencies, or, alternatively, to amend the court’s December 12, 2016 order and for
a grant of related relief is denied.
January 18, 2017.
SIDNEY A. FITZWATER
UNITED STATES DISTRICT JUDGE
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