MLC Group, Inc. v. Tenet Healthcare Corp. , 68 F. App'x 322 ( 2003 )

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
6-17-2003
MLC Grp Inc v. Tenet Healthcare
Precedential or Non-Precedential: Non-Precedential
Docket No. 01-4185
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 01-4185
_____________
MLC GROUP, INC. n/k/a EPLUS GROUP, INC.,
v.
TENET HEALTHCARE CORPORATION;
TENET HEALTH SYSTEM PHILADELPHIA,
INC.; OFFICE OF THE U.S. TRUSTEE,
MLC Group, Inc.,
Appellant
_____________
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civ. No. 01-cv-00881)
Honorable Donald E. Ziegler, District Judge
_____________
Argued: February 27, 2003
BEFORE: SCIRICA, Chief Judge* ,
GREENBERG and JOHN R. GIBSON ** , Circuit Judges.
(Filed: June 17, 2003 )
*Judge Scirica began his term as Chief Judge on May 4, 2003.
**The Honorable John R. Gibson, United States Court of Appeals for the Eighth
Circuit, sitting by designation.
Michael E. Geltner, Esquire (Argued)
Geltner & Associates
Number Ten E Street, S.E.
Washington, DC 20003
Counsel for Appellant
Beverly W. Manne, Esquire (Argued)
Tucker Arensberg
1500 One PPG Place
Pittsburgh, PA 15222
Counsel for Appellees,
Tenet Healthcare Corporation;
Tenet Health System Philadelphia, Inc.
_____________
OPINION OF THE COURT
_____________
JOHN R. GIBSON, Circuit Judge:
In this appeal from a district court decision affirming an order of a bankruptcy
court, MLC Group, Inc. seeks to recover from Tenet Healthcare rent on a lease of
equipment for a time period after MLC had sold the equipment to Tenet. The bankruptcy
court 1 found that MLC sold Tenet the lease schedules representing the equipment, and
therefore no rent accrued under the lease schedules. The district court affirmed. On
appeal, MLC contends that there was no sale of the schedules and argues that rent
continued to accrue. We will affirm the judgment of the district court.
1
The Honorable M. Bruce McCullough, United States Bankruptcy Judge for the
Western District of Pennsylvania.
2
I.
The debtors in the underlying bankruptcy proceeding are Allegheny Health
Education and Research Foundation and related entities,2 which we refer to collectively as
Allegheny. Allegheny leased computers from MLC under a master lease. The actual
equipment to be leased, as well as the rent owed for each item of equipment and the rental
term for each such item, were not described in the master lease, but in various schedules
attached to it.
Allegheny filed for Chapter 11 bankruptcy on July 21, 1998. Tenet purchased
Allegheny's assets on November 10, 1998, after which Tenet entered into possession of
the leased equipment. Under the asset purchase agreement, Tenet assumed liability for
the equipment lease as of the purchase date, but it did not assume pre-existing obligations.
On November 19, 1998, following negotiations and correspondence that will be
described more fully hereafter, Tenet paid MLC $1.1 million. There was no written
contract commemorating the parties' agreement. Later, on January 13, 1999, Tenet paid
MLC another $250,000 in connection with equipment in its possession that had been
overlooked in the earlier negotiations. Again, Tenet made the payment without benefit of
a written contract. What Tenet got for its $1.35 million is the subject of dispute.
Not until April 29, 1999, did Allegheny move to reject the MLC equipment lease
2
Allegheny University of the Health Sciences, Allegheny University Medical
Practices, Allegheny Hospitals, Centennial, and Allegheny University Hospitals-East.
3
as an executory contract. The bankruptcy court ordered that the leases be rejected as of
May 9, 1999, 180 days after Allegheny sold its assets to Tenet.
In August 1999, MLC filed an amended proof of claim in the bankruptcy
proceeding asking for rent under the leases. MLC asked for $537,043.68 in rent,
covering both the period from the bankruptcy petition (July 21, 1998) through the date of
Tenet's purchase of Allegheny's assets (November 10, 1998) and the period from the asset
sale up until May 9, 1999, the official lease rejection date. MLC then filed a motion for
payment of rent from the estate, citing 11 U.S.C. § 365(d)(10). Because Tenet had
assumed Allegheny's obligations that accrued after the asset purchase, Tenet was the real
party in interest defending against the motion to the extent it sought rent for the period
after the asset purchase. The bankruptcy court held an evidentiary hearing.
At the hearing, MLC's Chief Operating Officer, Thomas Howard, testified that
MLC did not sell the equipment to Tenet. "It was our understanding that we could not
sell the equipment, that it was part of the bankruptcy proceedings, and that it would
violate the process of bankruptcy," he said. He testified that MLC understood that the
November 19, 1998 payment from Tenet to MLC of $1.1 million was payment for "a
continuation of status quo" or "forbearance," and that at some point in the future,
depending on what happened in Allegheny's bankruptcy proceedings, there would be a
sale and transfer of title to Tenet. When MLC later discovered that some of the
equipment had not been included in the earlier transaction, it negotiated with Tenet for an
4
additional payment of $250,000 with regard to the equipment listed on Schedule 106.
MLC sent Tenet an "invoice" for $250,000. As with the $1.1 million transaction, Howard
said he "understood the agreement to be similar to the one that we had arranged before for
the previous schedules where we were allowing the equipment to stay in place, and we
were putting forth a charge to allow that to happen." Howard admitted that Tenet had
asked MLC to provide a bill of sale showing that the payments Tenet made included sales
tax. Howard said that he had responded: "[W]e had labeled this as a termination charge
so that it was not a taxable event in the State of Pennsylvania at the time it was issued."
At the hearing, Tenet called its Senior Vice President Alan Cranford, who testified
that he personally negotiated the purchase of the equipment with Phil Norton, who was
President and Chief Executive Officer of MLC. Cranford testified that after reaching an
oral agreement in mid-October 1998 (before the November 10 purchase of Allegheny's
assets), Norton and Cranford both drafted letters to memorialize the agreement and sent
them to each other for the other to sign. Neither signed the other's letter.3 Tenet's letter
stated that Tenet rejected all equipment lease agreements between MLC and Allegheny
and that Tenet agreed to purchase the assets listed on Schedules 100, 102 and 201 for
$1.1 million. Norton's letter on behalf of MLC said that Allegheny would "assume
MLC's lease in whole and assign it to Tenet"; that Tenet would "purchase all of the leased
3
There was no signed copy of the Tenet letter (which Cranford drafted for the
signature of another Tenet officer) in evidence, but Cranford testified that the letter was
sent to MLC about the last week in October. Howard testified at trial that he was
confident that Norton did not receive Cranford's letter.
5
equipment for $1,100,000, effective upon the closing of Tenet's purchase of the
hospitals"; that upon the purchase "MLC will have no further claims on either Tenet or
the equipment"; and that MLC would retain the right to receive "cure" payments from
Allegheny.4 Cranford said that when he received Norton's letter, he told Norton that
Tenet could not agree to assume the lease, but would prefer to do a straight purchase.
Cranford said that he did not recall Norton being concerned about this discussion, but that
Norton seemed interested in "moving forward with the transaction."
Cranford testified that shortly after Tenet's purchase of Allegheny's assets in
November, Cranford sent MLC a check for $1.1 million. Cranford understood that the
money was to pay for the "purchase of the assets under lease." After Tenet had paid MLC
the $1.1 million, Cranford and Norton discussed whether the $1.1 million included sales
tax; Tenet's position was that MLC would be responsible for sales tax on the transaction,
but MLC wanted to find a way to avoid having to pay sales tax. Cranford said that
Norton resolved this by characterizing the transaction as a "lease termination which he
felt [was] not subject to a sales tax." Cranford testified: "He assured me that the lease
termination would terminate the lease and that MLC would not seek to reacquire the
assets and would allow them to remain with Tenet."
With regard to the $250,000 payment, as early as November 6, 1998, MLC's
Norton sent Cranford a letter that began, "Thank you for your consideration in purchasing
4
MLC's counsel agreed in argument before the bankruptcy court that these "cure"
payments were "for matters prior to the sale."
6
Schedule 106 as we discussed." MLC then sent an invoice for Schedule 106
"Termination Charge."
On February 5, 2001, the bankruptcy court issued its first order. The court found
that M LC had sold Tenet Schedules 100, 102 and 201 on November 19, 1998.
Therefore, Tenet owed nothing on those lease schedules but the rent from November 10
(the day Tenet bought Allegheny's assets) to November 19. The bankruptcy court also
found that Tenet bought Schedule 106 at some point prior to December 9, 1998. The
court scheduled a hearing for February 21 to resolve issues concerning lease Schedule
103.
The court rejected MLC's claims based on its findings that (1) before payment of
the $1.1 million, the parties had corresponded concerning "purchase" of the equipment;
(2) before payment of the $250,000, Thomas Howard filed a pleading with the court
stating that Tenet had orally agreed to buy the Schedule 106 equipment; (3) it would have
made no economic sense for Tenet to have paid $1.35 million for "forbearance" without
acquiring ownership of the equipment, since back rent did not even remotely approach
that amount; (4) Tenet sent MLC a letter on February 19, 1999, asking MLC to confirm
that Tenet paid $1.1 million and $250,000 for "termination" of the leases, acquisition of
the equipment and associated taxes, which the bankruptcy court considered evidence that
Tenet understood it had purchased the schedules; and (5) the testimony of MLC's witness
Thomas Howard was inconsistent with the documents produced at trial and MLC failed to
7
produce Phil Norton, who was actually engaged in the oral negotiation of the transactions.
The court found "the entire idea of 'forbearance' with respect to the $1.35 million paid by
Tenet to have been concocted by MLC at some point well subsequent to November 19,
1998 or January 13, 1999, as a means by which the imposition of sales tax could be
avoided with respect to Tenet's acquisition of Schedules 100, 102, 201 and 106."
On March 21, 2001, the bankruptcy court issued a final order confirming its earlier
findings and entering judgment against Tenet for nine days' rent on Schedules 100, 102
and 201, in the amount of $12,850.69; for two days' rent under Schedule 106, in the
amount of $1,056.23 5 ; and for 180 days' rent with respect to Schedule 103, which Tenet
never purchased, in the amount of $901.92.
MLC appealed to the district court, which affirmed the bankruptcy court's orders.
II.
On appeal, M LC does not dispute that it sold the leased equipment to Tenet.
Instead, it now argues that the bankruptcy court did not "find" that Tenet bought the
schedules as well as the equipment, because the court did not point to any evidence that
would have supported such a finding.
We review the district court's order de novo. Interface Group-Nevada, Inc. v.
Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 145 F.3d 124, 130-31 (3d
5
The court found that the parties entered a contract for the Schedule 106
transaction as early as November 13, 1998, but the contract permitted payment to be made
later.
8
Cir. 1998). Both we and the district court review the bankruptcy court's legal
determinations de novo and its findings of fact under the clear error standard. Id.MLC contends that the bankruptcy court's conclusion that MLC sold Tenet the
schedules was a legal conclusion, subject to de novo review, not a finding of fact, subject
only to review for clear error. MLC argues that the only fact the court found was that the
parties agreed to the sale of the equipment and that the court made a legal determination
that sale of the equipment extinguished the schedules. Contrary to MLC's contentions,
the bankruptcy court's order leaves no doubt that the court found as a matter of fact that
the parties agreed to the sale of Schedules 100, 102, 201 and 106. The court wrote:
The Court rules as it does because it finds that MLC and Tenet
consummated a sale and purchase of Schedules 100, 102, and 201 on or
about November 19, 1998, and a sale and purchase of Schedule 106 at some
date prior to December 9, 1998, which means that after the aforesaid sales
dates (a) MLC no longer owned the Schedules such that it had the legal
ability to charge rent for the future use of the same, and (b) neither the
instant debtor nor Tenet via said debtor owed an obligation to MLC under
the Lease for the Schedules . . . .
Because there was no written contract, the determination of what the parties agreed
to is a question of fact.6 Johnston the Florist, Inc. v. Tedco Constr. Corp., 657 A.2d 511,
516 (Pa. Super. Ct. 1995) ("[I]n the case of a disputed oral contract, what was said and
done by the parties, as well as what was intended by what was said and done by the
6
MLC's brief makes a fleeting reference to the UCC statute of frauds for the sale of
goods, 13 Pa. C.S.A. § 2201. Tenet answers that any statute of frauds defense was not
raised below, and M LC's reply brief disavows reliance on such a defense. Accordingly,
we need not discuss this issue.
9
parties, are questions of fact to be resolved by the trier of fact. . . ."). We therefore review
the district court's findings for clear error.
It is true that much of the testimony at trial focused on whether or not the
equipment was sold. In contrast to its current position that there was a sale of the
equipment, but not of the schedules, at trial MLC contended that it did not sell anything,
but simply accepted the money in exchange for "forbearance." 7 MLC now agrees that
there is sufficient evidence to support a finding that the parties agreed to sale of the
equipment. At the same time, there is also sufficient evidence to support the finding that
the parties also agreed to the sale of the lease schedules. The most explicit evidence is a
November 6, 1998 letter from MLC's Norton to Tenet's Cranford, thanking him for
"purchasing Schedule 106 as we discussed."
Moreover, trial testimony and documentary evidence support the bankruptcy
court's finding that the parties considered the payments of $1.1 million and $250,000 to
cover the obligation represented by the lease schedules. Cranford testified that Norton
told him with regard to the $1.1 million payment "that it would be a lease termination
which he felt [was] not subject to a sales tax." Cranford said Norton "assured me that the
lease termination would terminate the lease and that MLC would not seek to reacquire the
assets and would allow them to remain with Tenet." Later, when the parties negotiated a
7
MLC argues that it raised the issue at trial about whether the schedules themselves
were sold. Counsel made such an argument in closing, but the trial testimony of MLC's
principal witness, Howard, focused on the contention that MLC did not sell the
equipment.
10
transaction to cover the Schedule 106 equipment which had been overlooked earlier,
Howard wrote Cranford a letter stating, "Enclosed is our invoice for the termination of
the Schedule 106 Equipment. . . ." The invoice identified the lease number as "Schedule
106" and the description stated: "Termination Charge." On February 19, 1999, Tenet sent
Howard a letter asking for confirmation that its payment for "termination" of the leases
and acquisition of the equipment included all applicable sales taxes.
This evidence that MLC agreed to "terminate" the schedules supports the
bankruptcy court's finding that the parties agreed that the lease schedules would be sold as
part of the negotiated transactions.8 Although in some other context there could be a
meaningful distinction between expression of an intent to sell a lease and expression of an
intent to terminate it, in this case, where the purchaser admittedly acquired the leased
property, "termination of the lease" and "sale of the lease" are simply two ways to
describe the same thing. The interpretation of language used in a contract, that is, the
determination of what ideas a contract's language induces in other persons, is a question
of fact. Medtronic Ave, Inc. v. Advanced Cardiovascular Sys., Inc., 247 F.3d 44, 53 n.2
8
MLC writes in its brief that Tenet could have protected itself from MLC's claim
by including "a provision in the purchase agreement that, effective on its purchase, the
lease schedules were extinguished." (emphasis added) In fact, Cranford testified that
Norton said the leases would be "terminated," and MLC sent correspondence using the
same word. "Extinguished" and "terminated" mean the same thing, at least in this
context. Therefore, given the extensive evidence that the parties agreed to "lease
termination," M LC's concession that an agreement to "extinguish" the schedules would
have protected Tenet dooms its argument that the leases survived the sale of the
equipment.
11
(3d Cir. 2001). The bankruptcy court's finding was not clearly erroneous.9
MLC argues that 11 U.S.C. § 365(d)(10) entitles it to payment of rent from the
bankruptcy estate, but as the bankruptcy court held, section 365(d)(10) does not revive a
right to rent payments for which the debtor is no longer liable. Once the schedules were
terminated, MLC's right to payments under section 365(d)(10) died with them.
We have reviewed MLC's various related arguments and find them to be without
merit.
For the foregoing reasons, we will affirm the judgment of the district court.
______________
TO THE CLERK:
Please file the foregoing not precedential opinion.
/s/ John R. Gibson
Circuit Judge
9
MLC also argued in its opening brief that sale of the lease schedules would be
"ineffective without 'perfection' under the UCC." However, in its reply brief, MLC
retreated from this position, saying that it did not argue that sale of the leases without
perfection would be invalid, but only that Tenet's failure to perfect was evidence there
was no sale of the schedules. Whatever evidentiary value this fact may have does not
render the bankruptcy court's finding clearly erroneous.