National Century Enterprises v. Biomar Technologies Inc et al

1
UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION AT COLUMBUS
In re: 	:
: 	Case No. 02-65235
NATIONAL CENTURY FINANCIAL 	: 	Chapter 11
ENTERPRISES, INC., ET AL., 	: 	Jointly Administered
: 	Judge Calhoun
Debtors. 	:
:
:
The Unencumbered Assets Trust, 	:
as successor in interest to 	:
National Century Financial Enterprises, Inc., 	:
et al., 	:
:
Plaintiff, 	:
:
v. 	: 	Adv. Pro. No. 04-2015
: 	Judge Calhoun
Biomar Technologies, Inc., et al. 	:
:
Defendants. 	:
:
MEMORANDUM OPINION FOLLOWING
TRIAL ON PLAINTIFF’S COMPLAINT
AND OBJECTION TO CLAIM
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: April 18, 2006
____________________________________________________________
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1The Court will refer to the Unencumbered Assets Trust as “Plaintiff” and Biomar
Technologies, Inc. as “Defendant” or “Biomar.” The Court will also use the terms “NCFE” to refer
to National Century Financial Enterprises, Inc. and 	“Debtors” to refer to the Debtors, which
includes NCFE and its related entities and subsidiaries that sought Chapter 11 bankruptcy relief.
2
In this adversary proceeding, the Unencumbered Assets Trust (successor in interest to the
Debtors—National Century Financial Enterprises, Inc. and its related entities) brought suit
against Biomar Technologies, Inc. to avoid and recover alleged fraudulent transfers.1 Following
a trial on Plaintiff’s fraudulent transfer claim, the Court finds that Biomar received a total of
$608,000.00 from NCFE as payment for software licenses and services that Biomar provided to
various third-party healthcare facilities. Because NCFE itself did not receive a concrete benefit
as a result of these payments in a quantity reasonably equivalent to $608,000.00, the Court finds
that Plaintiff can avoid these payments under section 548(a)(1)(B) of the Bankruptcy Code and is
entitled to judgment against Biomar in the amount of $608,000.00 under section 550(a)(1) of the
Bankruptcy Code.
Also within this suit, Plaintiff objected to Biomar’s proof of claim on two grounds, both
of which have merit. First, Plaintiff proved that NCFE never agreed to pay Biomar for the
software services Biomar allegedly rendered at one third-party hospital, VillaView University
Hospital (“Villa View”), and never agreed to pay Biomar the so-called “monthly maintenance”
fees for a set of third-party clinics, Clinica Medica Familiar (“Clinics”). Biomar’s claim consists
of the monies due for services and maintenance allegedly performed at VillaView and the
Clinics. Because NCFE never agreed to pay Biomar for the amounts that make up Biomar’s
claim, the claim should be disallowed under section 502(b)(1) of the Bankruptcy Code. Second,
the claim should also be disallowed because NCFE did not receive reasonable equivalent value
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even close to the amount of the alleged obligation under section 548(a)(1)(B) of the Bankruptcy
Code. Therefore, the Court sustains Plaintiff’s objection to Biomar’s claim.
I. Jurisdiction—Adversary Proceeding
The Court has jurisdiction over this adversary proceeding and objection to claim pursuant
to 28 U.S.C. §§ 157 and 1334 and the General Order of Reference entered in this district. The
adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(H) and the objection to
claim is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
II. Factual and Procedural Background
A. 	Debtors’ and Biomar’s Backgrounds
The Debtors were one of the country’s largest providers of healthcare accounts receivable
financing. The Debtors financed and serviced more than $15 billion in healthcare accounts
receivable. The Debtors also provided other financing and leasing services to healthcare
companies.
The Debtors historically financed the purchase of eligible receivables primarily through
private placement sales of bonds to institutional investors. The Debtors offered financing to
healthcare providers by purchasing from them certain of their receivables—monies due to the
providers from insurance companies and insurance-like programs—for services performed by
the providers. All of the Debtors’ outstanding bonds as of the NCFE petition date were issued
by Debtors NPF VI and NPF XII.
NPF VI and NPF XII were special purpose entities that obtained money from investors in
exchange for promissory notes. As of the Debtors’ Chapter 11 filings on November 18, 2002
(“Petition Date”), it is reported that the aggregate outstanding principal amount of the bonds
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2See Amedisys v. JP Morgan Chase Manhattan Bank (In re Nat’l Century Fin’l Enters., Inc.),
310 B.R. 580 (Bankr. S.D. Ohio 2004).
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issued by NPF VI was $924,995,000.00, and the aggregate outstanding principal amount of the
bonds issued by NPF XII was $2,047,500,000.00. 2
Biomar, founded in 1992, offers several computer software products utilized in the
healthcare industry. Biomar’s hospital information system tracks patient charges generated from
the point of admission through a patient’s stay in the hospital. The system captures all charges
including such services as laboratory tests and radiology work. Once the data is collected, the
system “drops” the billing information into a billing module, which formats the data for the
ultimate billing to the payor. The system further provides for compilation of the hospital’s
receivables. See Vol. I at 173; see also n.3, infra.
B. 	Proof of Claim and Pleadings
Biomar filed a proof of claim on April 22, 2003 in NCFE’s Chapter 11 case asserting that
NCFE owed Biomar $790,000.00 for pre-petition “services performed” at Santa Marta Hospital
(“Santa Marta”), VillaView, the Clinics and Lincoln Hospital Medical Center (“Lincoln
Hospital”). See Proof of Claim No. 711, Case No. 02-65235.
In investigating this proof of claim, NCFE’s post-petition management allegedly
determined that NCFE had made $608,000.00 in payments to Biomar in the approximately one
year prior to the Petition Date. See Plaintiff’s Ex. 1; Vol. I at 52-63. Because the books and
records of NCFE included no contract, lease, or loan documentation supporting either these
payments or Biomar’s claim, NCFE objected to Biomar’s $790,000.00 proof of claim and sued
Biomar to avoid and recover the $608,000.00 as fraudulent transfers. See Vol. I at 87; Vol. III at
40, 123.
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In its complaint and objection to claim filed on January 13, 2004, NCFE asserted claims
for avoidance of fraudulent transfers under sections 544(b) and 548(a) and recovery of those
transfers under section 550(a) of the Bankruptcy Code. NCFE also asserted the theory of unjust
enrichment and objected to Biomar’s claim under sections 502(b)(1) and 548(a) of the
Bankruptcy Code. See Doc. 1. Biomar’s claim allegedly consisted of unpaid invoices relating to
the licensing of computer software and provision of software and data conversion services to
various healthcare providers. See id., ¶¶ 12-13. Similarly, NCFE alleged that the $608,000.00
payments made by NCFE to Biomar are avoidable fraudulent transfers that benefitted unrelated
third-party healthcare providers not affiliated with NCFE. In its answer, Biomar asked that the
Court enter judgment in its favor and allow its claim in full. See Doc. 5.
On October 4, 2004, Biomar moved to amend its proof of claim, see Doc. 27, in an
attempt to fit its claim into the C-7 Convenience Class under the Debtors’ Joint Plan of
Liquidation. See Vol. II at 133-34. In its proposed amended claim, Biomar withdrew its
claim for payment for services rendered to Santa Marta and its claim for a $150,000.00
“termination fee” relating to Lincoln Hospital. The amended proof of claim seeks payment of
$495,000.00 only, relating to services Biomar says it provided at the Clinics and VillaView.
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3Robert Hamilton, Mary Tait, and David Beck appeared on behalf of Plaintiff and Michael
Kolman and Rick Brunner appeared on behalf of Biomar. “Vol. I” refers to the trial transcript for
the first day of trial dated July 26, 2005. See Doc. 3770, Case. No. 02-65235 (contains incorrect
cover sheet dated July 27, 2005 and docket information). “Vol. II” refers to the trial transcript for
the second day of trial dated July 27, 2005. See Doc. 3771, Case. No. 02-65235 (contains incorrect
cover sheet dated July 26, 2005 and docket information ). “Vol. III” refers to the trial transcript for
August 10, 2005. See Doc. 3769, Case. No. 02-65235.
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C. 	Trial
The Court conducted a trial on July 26 and 27, 2005, and heard remaining testimony on
August 10, 2005.3 Witnesses for the Plaintiff included Charles Jennings, Jeffrey Benton, and
Joyce Chester. Witnesses for Biomar included Allan Martia and Randolph Speer.
Mr. Jennings consults for the Plaintiff and formerly headed client services for NCFE,
which would handle bankruptcy and litigation matters involving NCFE’s client healthcare
providers. See Vol. I at 36-38. Mr. Benton, a CPA, manages FTI Consulting and currently acts
as financial advisor to Irwin Katz, the Trustee for the Plaintiff. See id. at 129-30. Ms. Chester
was an account manager for NCFE for approximately 10 years until November 2004. See Vol.
III at 200. Mr. Martia formed Biomar in 1992 with two other people and has been the President
and CEO since its inception. See Vol. I at 171. Mr. Speer was the chief financial officer of
NCFE from September 1999 to November 2002. See Vol. III at 10.
The parties submitted the following post-trial briefs to the Court: Defendant Biomar’s
Post Trial Brief: Proposed Findings of Fact and Conclusions of Law (Doc. 86); Plaintiff’s Post-
Trial Brief (Doc. 87); Plaintiff’s Proposed Findings of Fact and Conclusions of Law (Doc. 88);
Plaintiff’s Objections to Exhibits of Defendant Biomar Technologies, Inc. (Doc. 89); Plaintiff’s
Post-Trial Reply Brief (Doc. 90); and Defendant Biomar’s Reply Brief to Plaintiff’s Post-Trial
Brief, Proposed Findings of Fact and Conclusions of Law, and Objections to Exhibits of
Defendant Biomar (Doc. 91).
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The Court also considered the parties’ pre-trial filings. See Order (Doc. 69) at 2 (“The
briefs submitted in support of and in opposition to the summary judgment requests will be
treated by the Court as trial briefs[.]”); see also Plaintiff’s Motion in Limine to Preclude Hearsay
Evidence (Doc. 72) and Defendant Biomar Technologies, Inc.’s Memorandum in Opposition to
Plaintiff’s Motion in Limine (Doc. 79).
1. 	Lincoln Hospital
At trial, Mr Jennings testified that between October 2001 and October 2002, NCFE paid
Biomar $358,000.00 for a software system at Lincoln Hospital. See Vol. I at 64; Plaintiff’s Ex.
1. This amount included nine monthly payments of a purported maintenance fee. See Vol. I at
63-64. According to Mr. Speer, NCFE agreed to make these monthly payments “to ensure that
[Allan Martia] had the cash flow to keep his business operating.” Vol. III at 127 (quoting from
Mr. Speer’s deposition). Mr. Martia specifically insisted that NCFE pay Biomar directly
because he doubted Lincoln Hospital’s financial stability to pay its bills. See Vol. II at 77.
Mr. Jennings also testified that Lincoln Hospital was a small inner-city Los Angeles
hospital that was indirectly owned by NCFE’s founders, Lance Poulsen, Barbara Poulsen, Don
Ayers and Rebecca Parrett. See Vol. I at 40-41. Lincoln Hospital was entirely dependent on
funding from NCFE for its survival. See id. at 42, 49. As early as 1993, Lincoln Hospital had
been selling its eligible receivables to NCFE’s special purpose entities—NPF VI and NPF
XII—under a succession of sale and subservicing agreements. See id. at 42-43.
According to Mr. Jennings, Lincoln Hospital did not generate enough eligible receivables
to fund its operations and was dependent on unsecured loans from another of NCFE’s special
purpose entities—NPF X—to stay in business. See id. at 49. In 2001, NPF X advanced Lincoln
Hospital $15,000,000.00. See id. at 50. Between January 1, 2002 and that summer, NPF X also
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4In re Lincoln Hospital Medical Center, Inc., Case No. LA-02-42584, U.S. Bankruptcy
Court, C.D. Cal. filed on November 18, 2002.
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advanced Lincoln Hospital another $12,000,000.00. See id. Mr. Jennings and Mr. Benton
agreed that Lincoln Hospital was itself hopelessly insolvent during the time period when NCFE
was paying Biomar to provide a software system for Lincoln Hospital. See id. at 77, 158-59.
When Lincoln Hospital filed for relief under Chapter 11 of the Bankruptcy Code in
November 20024, it owed the Debtors over $150,000,000.00 according to Mr. Jennings. See
Vol. I at 47-51. Lincoln Hospital owed NPF XII approximately $45,000,000.00 and owed
NPF VI approximately $50,000,000.00. See id. at 47. Of this nearly $100,000,000.00 owed
from the purchase of pre-petition receivables, Mr. Jennings testified that less than $600,000.00 in
receivables was ever collected post-petition. See id. at 49. Additionally, as of its petition date,
Lincoln Hospital owed NPF X approximately $57,000,000.00 for unsecured advances. See id. at
50-51, 108. Mr. Jennings explained that Lincoln Hospital was eventually sold to its post-petition
lender, Sun Capital, for only $3,000,000.00—the amount of that lender’s advances to the debtor
in possession. See id. at 78-79.
Mr. Jennings also testified about a comparison he performed between 1) submitted/
captured gross accounts receivable; 2) eligible accounts receivable; and 3) collections for time
periods before and after the installation of the Biomar system at Lincoln Hospital in March 2002.
See Vol I at 80-87; Plaintiff’s Ex. 7. While gross receivables submitted by Lincoln Hospital to
NCFE for funding increased after the installation of the software, Mr. Jennings stressed that
eligible receivables—those that NCFE determines to be eligible for purchase through its funding
program—experienced no material change after installation, and collections actually decreased.
See id.
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Mr. Jennings also testified that NCFE experienced no decrease in labor costs as a result
of the installation of the Biomar system at Lincoln Hospital. See Vol. I at 86. Even assuming
there was an improvement in backup data for Lincoln Hospital, Mr. Jennings stated it did not
result in any economic benefit to NCFE. See id.
On the other hand, Mr. Martia, Biomar’s CEO, extolled the qualities of Biomar’s
software system calling it “wildly successful.” See Vol. I at 222. 	Mr. Martia also commented
on the benefits that NCFE reaped once the system was installed at Lincoln Hospital (and at one
of the Clinics where the system went live). He stated that the Biomar system provided detailed
information to NCFE concerning accounts receivable on a weekly basis, allowed NCFE to verify
that the receivables they were purchasing had value, enabled NCFE to generate the entire
medical bill if necessary, and provided NCFE the added benefit of a back-up system and back-up
documentation of Lincoln Hospital’s receivables. See id. at 181-85.
Mr. Speer, NCFE’s former CFO, stated that NCFE was satisfied with the Biomar system
and that it performed as expected. See Vol. III at 78. According to Mr. Speer, the Biomar
system enabled NCFE to receive the quick data capture it desired and provided data that could
potentially serve as a valuable commodity in the future, meaning the data could have served as a
source of revenue in the future. See id. at 80-82.
Mr. Speer also emphasized that the Biomar system provided NCFE with a “mirrored
system” providing for a duplicate, fully functioning server hardware housed at the Biomar office,
which was the same as the hardware located at the healthcare facility. According to Mr. Speer,
NCFE had immediate access to complete outstanding medical receivables files, which assured
uninterrupted service and access to the receivables for collection purposes. Mr. Speer also stated
that the Biomar system facilitated rebilling electronically. He further explained that lockbox
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collections decreased after installation because the Biomar system helped eliminate the need for
reliance on receiving payments at a lockbox. See Vol. III at 80-87.
Lastly, Mr. Speer claimed that the Biomar system installed at Lincoln Hospital resulted
in increased revenues for Lincoln and a corresponding increase in the receivables that NCFE
could ultimately purchase. The increase in receivables available to NCFE would then allow
NCFE to also experience a rise in revenue. Counsel for Biomar elicited the following testimony
from Mr. Speer on direct examination regarding the impact that the Biomar system had on
NCFE’s revenues:
Q. 	Okay. Did you notice any trends as far as the
receivables were concerned following the installation of the Biomar
system?
A. 	. . . .With respect to the information provided by
Biomar systems, they were always found to be complete and
accurate. I have to condition that in that I didn’t do any follow-up
work to determine independently that the information was accurate.
What I found was positive trends in the receivables. They
were increasing as a result of capturing more revenues, which was
part of the system design, to automatically capture charges as those
charges were initiated at the correct departmental levels.
And so we did see a rise in their revenues as a result of
installation. Beyond that, you know, I didn’t do any deep analysis.
I didn’t perform any diligence or background work with respect to
the numbers.
I didn’t do any follow-up with collections, other than
internally we would have generated collection reports based on
monies deposited into NCFE-controlled lock boxes.
I condition that statement because it’s always possible that
collections don’t reach those lock boxes, and so no work was done
on my behalf to validate that data or deem it accurate or complete.
Vol. III at 82-83. Counsel for Plaintiff elicited the following testimony from Mr. Speer on cross
examination that went to the issue of the effect that the Biomar System may have had on NCFE’s
bottom line:
Q. 	And then the next question was: “Did you make any
determination as to whether or not the installation of the Biomar
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software at Lincoln ended up causing NCFE to lose more money
or lose less money than it would have otherwise?”
Do you see that question, sir?
A. 	Yes.
Q. 	And your answer was: “No. No analysis was ever
done in that context.”
Do you see that answer, sir?
A. 	Yes, I do.
Q. 	Were those answers true and correct at the time
you gave them?
A. 	Well, I think in all fairness, we should probably
start at the beginning again and you should give me one question at
a time.
Q. 	Was the answer, no, no analysis was ever done on
that context, Page 278, Line 20, was that a true and correct answer
at the time you gave it?
A. 	I didn’t have to perform an analysis, no.
Q. 	Well, sir, the question was: “Did you make any
determination as to whether or not the installation of the software
at Lincoln ended up causing NCFE to lose more money or lose less
money than it would have otherwise?”
And your answer, sir, was “No.” Right?
A. 	That’s correct. But to be – to clarify, I think that
still remains to be seen.
As I stated in this morning’s testimony, you know, the goal
at NCFE was to capture dat[a]. We were able to do that very well
with the Biomar system.
We were able to store their data on our systems. We had
mirror systems at Biomar. Whether that actually brought value to
NCFE at a later date is a question for a later date, and clearly
would never be answered at this point.
But as I stated earlier, the goals were met. We had better
data. We had complete data for billing purposes, and we had the
potential of a database that had value to third parties.
Id. at 137-139. The Court also questioned Mr. Speer following his examination by counsel, for
further clarification on the impact that the Biomar system may have had on NCFE’s finances:
Q. 	Well, then, did the eligible accounts receivable
increase then after–you testified the difference between the
submitted gross receivables and those considered eligibles for
lending or reimbursement. Did they increase, the eligible
accounts?
A. 	That answer is a little more complex because it
depends on the circumstances.
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. . . .
And so, you know, as I mentioned in my testimony, the
complexity of medical billing is very extensive, and the actual
payment of an invoice, you know, can vary based on all kinds of
variables to include who is going to pay it and what charges were
actually submitted.
Q. 	So then did National Century obtain an increase in
revenues as a result of capturing these new charges?
A. 	Yes. Directly related to new charges, we would
have had a larger outstanding balance for that relationship, in
theory.
And so if more receivables were created, more receivables
would have been purchased, more receivables then would have
been subject to a finance fee and, therefore, more earnings would
have been recognized by National Century.
Q. 	That brings me then to really the basis of the
preceding questions, is: How did the collection percentage change
after this system?
A. 	That, I can’t give a specific answer because I’m not
familiar with the detail.
Generally speaking, if you improve your billings, gross and
eligible, your collections should follow suit and also improve. I
don’t recall, and I wasn’t tracking collections that closely to recall
whether that was an accurate fact with this particular installation
and hospital.
Vol. III at 172-175.
2. 	Clinica Medica Familiar
In April 2002, according to Mr. Jennings, NCFE paid Biomar $250,000.00 relating to
software licenses and services for the five Los Angeles area healthcare clinics known
collectively as Clinica Medica Familiar. See Vol. I at 58-60. Mr. Martia and Mr. Speer admitted
that there was no contract, no loan, and no lease among any of the parties to this asserted
arrangement. See id. at 87; Vol. III at 123. After nearly a year of installation work at the
Clinics, they confirmed that the Biomar system went on-line at only one of the five clinics. See
Vol. II at 10-11; Vol. III at 52.
Biomar asserts, in its amended proof of claim, that NCFE should pay Biomar an
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additional $315,000.00 for work allegedly done by Biomar in getting ready for installation of the
software at the Clinics (seven monthly “maintenance” payments of $45,000.00). Mr. Martia
acknowledged that NCFE never agreed to pay these fees and it was the Clinics’
responsibility to make these payments. See Vol. I at 209; Vol. II at 46, 55, 77, 79.
3. 	VillaView Hospital.
Biomar asserts, in its amended proof of claim, that it is owed $180,000.00 from
NCFE for services allegedly provided to VillaView. Mr. Jennings testified that NCFE did not
agree to pay Biomar for software and services for VillaView. See Vol. I at 87. Mr. Martia and
Mr. Speer’s testimony do not contradict Mr. Jennings’ contention regarding VillaView. See Vol.
I at 213-14; Vol. III at 62-63, 123-24. 	And, Mr. Speer acknowledged that VillaView never even
agreed to install the Biomar system. See Vol. III at 123.
III. Arguments of the Parties
Plaintiff asserts that NCFE did not receive reasonably equivalent value for its payments
to Biomar on behalf of Lincoln Hospital and the Clinics. Plaintiff seeks avoidance and recovery
of the payments that NCFE made to Biomar relating to Lincoln Hospital and the Clinics, totaling
$608,000.00, as fraudulent transfers. Plaintiff also seeks an order sustaining its objection to
Biomar’s proof of claim. Plaintiff argues that NCFE also did not receive reasonable equivalent
value even close to the amount of the obligation listed in the claim. Biomar reduced its claim to
$495,000.00 relating to services Biomar says it provided the Clinics and VillaView. Plaintiff
also asserts that claim should be disallowed because NCFE never agreed to pay Biomar for the
services performed at VillaView or the “monthly maintenance” fees at the Clinics.
Biomar argues that it reached an agreement with NCFE to perform work at Lincoln
Hospital and the Clinics; as for VillaView, Biomar maintains it began work on an information
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system at NCFE’s request. Biomar contends that it performed all the work at these facilities in
good faith. Relying on the testimony of Mr. Martia and Mr. Speer, Biomar asserts that NCFE
indeed received reasonable equivalent value for the services Biomar performed at Lincoln
Hospital, the Clinics, and VillaView. Biomar also disputes whether NCFE was insolvent when
Biomar installed these systems at the third-party healthcare facilities.
IV. Law and Analysis
A. 	Evidentiary Issues
1. 	Plaintiff’s Exhibits
Plaintiff submitted 40 exhibits for admission at trial. Biomar lodged objections to
Plaintiff’s Exs. 6 and 7; therefore, Plaintiff’s other 38 exhibits are admitted without objection.
Plaintiff offered a declaration of John Carvelli as Plaintiff’s Ex. 6. See Vol. I at 160. This
declaration was originally submitted in Lincoln Hospital’s bankruptcy case, in support of the
Debtor Lincoln Hospital’s Motions (1) to Approve Sale of Substantially All of the Debtor’s
Assets Free and Clear of Liens and Interests and to Approve Related Overbid Procedures; and
(2) to Assume and Assign Unexpired Leases and Executory Contracts. See id.; see also
Plaintiff’s Ex. 6, ¶ 1. John Carvelli was the President and Chief Executive Officer of Lincoln
Hospital. See Plaintiff’s Ex. 6, ¶ 1.
The substance of Mr. Carvelli’s declaration is relevant to this trial because in it,
Mr. Carvelli states that (i) Lincoln Hospital’s primary source of revenue was generated by the
sale of accounts receivable to subsidiaries of NCFE, id. ¶ 4; (ii) Lincoln Hospital was entirely
dependent on the sale of its receivables to NCFE subsidiaries to continue operating, id. ¶ 5;
(iii) NCFE’s subsidiaries asserted a claim against Lincoln Hospital in excess of $115 million, id.
¶ 7; (iv) Lincoln Hospital’s post-petition lender collected only approximately $254,864.57 on
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pre-petition receivables, id. ¶ 8; (v) representatives of Lincoln Hospital contacted potential
purchasers in the relevant market and healthcare industry to try to sell Lincoln Hospital, id. ¶¶
11, 22; (vi) none of the potential purchasers offered an amount in excess of the amount already
owed to Lincoln Hospital’s post-petition lender—$3,089,866.67, id. ¶¶ 9, 11; and (vii) the
amount owed to the post-petition lender was equivalent to the true market value of Lincoln
Hospital, id. ¶ 21.
Biomar’s objection to the admission of this declaration as hearsay is without merit. This
declaration is expressly excluded from hearsay by Federal Rule of Evidence 801(d)(2)(B) as a
party admission. Rule 801(d)(2)(B) provides in pertinent part that a statement is not hearsay if
“[t]he statement is offered against a party and is . . . a statement of which the party has
manifested an adoption or belief in its truth[.]” Fed. R. Evid. 801(d)(2)(B). This declaration is
an adoptive admission of Biomar because Biomar offered this declaration in support of its
summary judgment reply brief in this adversary proceeding. See Biomar Technologies, Inc.’s
Reply Brief in Support of its Motion for Summary Judgment (Doc. 54) at 13; Supplemental
Affidavit of David J. Richardson (Doc. 55), Ex. C.
By asking this Court to enter judgment on its claims in this adversary proceeding based
in part on the truth of the matters asserted in the declaration, Biomar “manifested an adoption or
belief in its truth” for the purposes of Rule 801(d), making the declaration admissible at trial.
See U.S. v. Morgan, 581 F.2d 933, 937-38 (D.C. Cir. 1978) (affidavit admissible against
government as adoptive admission where government manifested belief in truth of affidavit
when government submitted the same affidavit in pre-trial proceedings); Buckley v. Airshield
Corp., 116 F. Supp. 2d 658, 664 (D. Md. 2000) (affidavits submitted to court by defendants in
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5In his nearly 10 years with NCFE, Mr. Jennings explained that he spent the bulk of his time
working with attorneys around the country, gathering data, analyzing data and explaining it to the
company’s attorneys. After NCFE declared bankruptcy, Mr. Jennings assisted the then management
team until December 2004 by obtaining and analyzing data regarding NCFE’s past and present
operations. See Vol. I at 36-38.
16
prior case admissible against defendants as adoptive admissions in present case). For these
reasons, the Court overrules Biomar’s objection and admits Plaintiff’s Ex. 6 into evidence.
Turning to Biomar’s objection to Plaintiff’s Ex. 7, the Court finds it similarly lacks merit.
Plaintiff’s Ex. 7 consists of a chart comparing Lincoln Hospital’s submitted gross receivables,
eligible receivables and collections for four different periods, both before and after installation of
the Biomar system at Lincoln Hospital. See Vol. I at 80. Charles Jennings provided the numbers
that were used in the preparation of the chart. See id. at 93. Mr. Jennings obtained the numbers
in the chart from a review of voluminous records of NCFE including Huntington bank deposit
statements and an extensive computer database. See id. at 125-27. Mr. Jennings then cross-
checked the numbers in the chart against approximately 15 to 20 additional documents. See id.
at 127. 5
Mr. Jennings testified that, based on his review of the computer database and other
records at NCFE, the eligible receivables, i.e., the receivables which NPF XII (a NCFE related
entity) could purchase under the terms of its indentures, did not show any material change after
installation of the Biomar system. See id. at 80-85. Mr. Jennings also testified that there was no
increase in collections in Lincoln Hospital’s lockbox account after installation of the Biomar
system. See id. at 85-86.
The Court finds that Plaintiff’s Ex. 7 is admissible under Federal Rule of Evidence 1006.
Rule 1006 provides that, “[t]he contents of voluminous writings, recordings, or photographs
which cannot conveniently be examined in court may be presented in the form of a chart,
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17
summary, or calculation. The originals, or duplicates, shall be made available for examination or
copying, or both, by other parties at reasonable time and place. The court may order that they be
produced in court.” Fed. R. Evid. 1006.
The chart summarizes the contents of an extensive electronic database and other
documents such as bank records. See Vol. I. at 125-27, 164; see also Vol. III at 140-41, 151.
Additionally, the documents and computer records supporting the chart are themselves
admissible as business records under Fed. R. Evid. 803(6). Finally, NCFE’s books and records
were made available to Biomar for more than a year prior to the trial, and according to Plaintiff,
Biomar showed no interest in reviewing documents relating to Lincoln Hospital’s reported
receivables or collections. See Vol. I at 164.
Lastly, Plaintiff relied on a summary of collections received in the Lincoln Hospital
lockbox derived from the very same computer database in its motion for summary judgment.
See Doc. 46, Ex. A. Thus, Biomar was on notice as of at least January 2005 that the Plaintiff
intended to rely on a summary of the electronic evidence of collections in Lincoln Hospital’s
lockbox, yet Biomar apparently still made no request to review the computer database. For these
reasons, the Court overrules Biomar’s objection and admits Plaintiff’s Ex. 7 into evidence.
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2. 	Biomar’s Exhibits
Plaintiff objects to a number of exhibits proffered by Biomar because they are allegedly
hearsay and do not satisfy the business records exception to the hearsay rule. See Doc. 89.
Plaintiff’s objection rests on the premise that the exhibits in question are hearsay in the first
place. Biomar contends the objected to exhibits are not hearsay because they are not offered for
the truth of their contents. See Doc. 91.
The objected to exhibits will only constitute hearsay if they are “offered in evidence to
prove the truth of the matter asserted.” Fed. R. Evid. 801(c). Biomar claims the exhibits to
which Plaintiff objects are not offered to prove the truth of their contents. For example, Biomar
is not asserting that a particular server configuration was acceptable with the addition of a
tape backup (Defendant’s Ex. I), that Lincoln Hospital requested additional workstations at one
point (Defendant’s Ex. Y), or that a particular personal computer was to be shipped directly to
Biomar (Defendant’s Ex. P). Rather, Biomar asserts that these exhibits at issue are offered to
demonstrate a course of conduct between all of the parties involved.
The Court accepts Biomar’s position that the exhibits to which Plaintiff has objected are
not offered for their truth, but instead to show a course of conduct between the parties; thus, the
Court finds that the Biomar exhibits at issue are not hearsay. See U.S. v. Tokars, 95 F.3d 1520,
1535-36 (11th Cir. 1996) (statements offered “to explain the course of conduct do not constitute
hearsay at all”); U.S. v. Parillo, 1992 WL 179243, at *4 (6th Cir. July 28, 1992) (“Since the
purpose of the hearsay was admitted to explain Mackin’s course of conduct and not to prove the
illegality of Parillo’s conduct, the trial court’s ruling was not clearly erroneous”); Williams v.
Gen. Motors Corp., 18 F. App’x 342, 348 (6th Cir. 2001) (statement offered “not for the truth of
the matter asserted, but in order to show Roberts’ course of conduct . . . was not hearsay at all.”).
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Because the exhibits to which Plaintiff objects are not offered for their truth, they are not
hearsay in the first instance. Therefore, the Court admits those exhibits, but only for the purpose
of showing a course of conduct between the parties and not for the truth of the matter asserted in
them. Biomar’s other exhibits to which there was no objection are also admitted.
B. 	Fraudulent Transfers
Plaintiff seeks to avoid a total of $608,000.00 in alleged pre-petition fraudulent transfers
to Biomar (“Transfers”) under sections 544(b) and 548(a)(1)(B) of the Bankruptcy Code, and
recover the Transfers, or the value thereof, under section 550. The avoidance power is afforded
to Plaintiff as debtor in possession because fraudulent transfers diminish the assets of the debtor
to the detriment of all creditors. See Enwotwen Indus., Inc. v. Brookstone Ltd. P’ship (In re
Newtowne, Inc.), 157 B.R. 374, 378 (Bankr. S.D. Ohio 1993) (internal quotation marks and
citations omitted). Section 544(b) of the Bankruptcy Code incorporates the state fraudulent
transfer laws by providing that:
the trustee may avoid any transfer of an interest of the debtor in
property or any obligation incurred by the debtor that is voidable
under applicable law by a creditor holding an unsecured claim that
is allowable under section 502 of this title or that is not allowable
only under section 502(e) of this title.
11 U.S.C. § 544(b)(1). Under section 544(b), Plaintiff may avoid any fraudulent transfers that
could have been avoided by a creditor of the Debtors under applicable law, in this case the Ohio
Uniform Fraudulent Transfer Act. See Ohio Rev. Code Ann. §§ 1336.01-1336.11 (West 2004).
Section 1336.04 of the Ohio UFTA provides in pertinent part:
(A) A transfer made or an obligation incurred by a debtor is
fraudulent as to a creditor, whether the claim of the creditor arose
before or after the transfer was made or the obligation was
incurred, if the debtor made the transfer or incurred the obligation
in either of the following ways:
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6In a Chapter 11 context, these powers are also available to the debtor in possession pursuant
to § 1107(a). Plaintiff, being the successor in interest to the debtor in possession, can utilize these
powers.
20
. . .
(2) Without receiving a reasonably equivalent value in
exchange for the transfer or obligation, and if either of the
following applies:
(a) The debtor was engaged or was about to engage in a
business or a transaction for which the remaining assets of the
debtor were unreasonably small in relation to the business or
transaction;
(b) The debtor intended to incur, or believed or reasonably
should have believed that he would incur, debts beyond his ability
to pay as they became due.
Ohio Rev. Code Ann. § 1336.04. The Ohio UFTA has a four-year reach-back period for the
types of fraudulent transfers described in § 1336.04. See Ohio Rev. Code Ann. § 1336.09.
Similarly, section 548 of the Bankruptcy Code sets forth the powers of a trustee or debtor
in possession 6 in bankruptcy to avoid fraudulent transfers. It permits the debtor in possession “to
set aside transfers that are tainted with actual fraud and certain other transfers, commonly
referred to as constructively fraudulent transfers.” Sensenich v. Molleur (In re Chase), 328 B.R.
675, 678 (Bankr. D. Vt. 2005) (citing BFP v. Resolution Trust Corp., 511 U.S. 531, 535, reh’g
denied, 512 U.S. 1247 (1994)). “Section 548 permits avoidance if the [debtor in possession] can
establish (1) that the debtor had an interest in property; (2) that a transfer of that interest occurred
within one year of the filing of the bankruptcy petition; (3) that the debtor was insolvent at the
time of the transfer or became insolvent as a result of the transfer; and (4) that the debtor
received ‘less than a reasonably equivalent value’ in exchange for such transfer.” Id. at 678-79
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(quoting 11 U.S.C. § 548(a)(1)(B)) (other citation omitted). Section 548(a)(1)(B) states, in
pertinent part:
(a)(1) The trustee may avoid any transfer of an interest of the
debtor in property, or any obligation incurred by the debtor, that
was made or incurred on or within one year before the date of the
filing of the petition, if the debtor voluntarily or involuntarily–
. . .
(B)(i) received less than a reasonably equivalent value in
exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made
or such obligation was incurred, or became insolvent as a
result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about
to engage in business or a transaction, for which any
property remaining with the debtor was an unreasonably
small capital; or
(III) intended to incur, or believed that the debtor would
incur, debts that would be beyond the debtor’s ability to
pay as such debts matured.
11 U.S.C. § 548(a)(1)(b). See also Turner v. JPB Enters., Inc. (In re Maine Poly, Inc.), 317 B.R.
1, 8 (Bankr. D. Me. 2004) (“[T]o succeed in [an] action under § 548(a)(1)(B), [one] must show
that ‘(1) a transfer was made, (2) the transferred property belonged to the debtor, (3) the transfer
was made within one year prior to the filing of the petition, (4) the transfer was made for less
than equivalent value, and (5) at a time the debtor was insolvent or was made insolvent by the
transfer.’”(internal citation omitted)); Newtowne, 157 B.R. at 378 (“A trustee or
debtor-in-possession may avoid a debtor’s transfer of property made within one year of the filing
of a bankruptcy petition if: (1) the debtor ‘received less than a reasonably equivalent value in
exchange for such transfer’ and; (2) the debtor was insolvent at the time of the transfer or
rendered insolvent by the transfer.” (citation omitted)).
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7The parties do not dispute that the Transfers occurred within the reach-back periods.
22
Thus, under applicable law, 7 Plaintiff must prove three things in order to establish that
the Transfers can be avoided as fraudulent transfers. First, Plaintiff must show that NCFE
transferred its property to Biomar. Second, Plaintiff must prove that NCFE did not receive
“reasonably equivalent value” in exchange for the Transfers. Third, Plaintiff must show that
NCFE was insolvent at the time of the Transfers. Plaintiff has the burden of establishing its
fraudulent transfer claims.
The Code separates the avoidance of a fraudulent transfer from the recovery of a
fraudulent transfer. See Levit v. Ingersoll Rand Fin. Corp., 874 F.2d 1186, 1196 (7th Cir. 1989).
Once the grounds for setting aside a transfer are met, the debtor in possession faces the second
hurdle of establishing a means of recovery under § 550(a), the remedies section, which requires
the trustee to identify a specific category of persons from whom recovery of the fraudulent
transfer may be had. See Savage & Assocs., P.C. v. BLR Servs. SAS (In re Teligent), Inc., 307
B.R. 744, 749-50 (Bankr. S.D.N.Y. 2004). Section 550 restricts the debtor in possession to
recovery of the avoided transfer, or its value, from the initial and subsequent transferees and the
entities for whose benefit the transfer was made. See id.
1. 	Biomar’s Receipt of the Transfers from NCFE
In October 2001, NCFE paid Biomar $50,000.00 for a software license for Lincoln
Hospital, and an initial installation fee of $32,000.00. See Plaintiff’s Ex. 1; Vol. I at 63.
NCFE made three additional payments of $32,000.00 for installation of the software at Lincoln
Hospital. See id. Thereafter, beginning in January 2002, NCFE paid Biomar a monthly fee of
$20,000.00. See id. at 63-64. The total amount of payments made by NCFE to Biomar for the
software system at Lincoln Hospital was $358,000.00. See id. at 64.
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In April 2002, NCFE paid Biomar $250,000.00 relating to software licenses and services
for the Clinics. See Plaintiff’s Ex. 1; Vol. I at 58-60. Of this amount, $200,000.00 was for
license fees and $50,000.00 was for installation. See id. at 60-64. All of the funds NCFE
transferred to Biomar, i.e., the Transfers, constituted property of NCFE. Additionally, the
Transfers went to Biomar directly—thus, Biomar was the “initial transferee” of the Transfers.
Thus, the Court finds that Biomar received a total of $608,000.00 from NCFE for
software licenses and services that Biomar provided to the third-parties Lincoln Hospital and the
Clinics. Biomar has admitted receiving these payments. Thus, Plaintiff has proved the first
element of its claim for avoidance of the Transfers.
2. 	NCFE did not Receive Reasonable Equivalent Value for the Transfers
The second element Plaintiff must prove is that NCFE did not receive reasonably
equivalent value for the Transfers. “To assess whether a challenged transfer is supported by
reasonably equivalent value, ‘courts generally compare the value of the property transferred with
the value of that received in exchange for the transfer.’” Dayton Title Agency, Inc. v. White
Family Cos., Inc. (In re Dayton Title Agency, Inc.), 292 B.R. 857, 874 (Bankr. S.D. Ohio 2003)
(quoting Corzin v. Fordu (In re Fordu), 201 F.3d 693, 707 (6th Cir. 1999)). Although there does
not have to be a “penny-for-penny” exchange, “courts should keep the equitable purposes behind
fraudulent transfer law in mind, recognizing that any significant disparity between the value
received and the value surrendered will significantly harm innocent creditors.” Id. “Case law
has determined that what amounts to ‘reasonably equivalent value’ under the statute depends on
the facts and circumstances of the case. Value has been defined as that which provides an
economic benefit, either directly or indirectly to the debtor.” Schilling v. Montalvo (In re
Montalvo), 333 B.R. 145, 150 (Bankr. W.D. Ky. 2005). 	“Whether a transfer is made for
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reasonably equivalent value is a question of fact to be determined from all the evidence in a
particular case.” Silagy v. Gagnon (In re Gabor), 280 B.R. 149, 162 (Bankr. N.D. Ohio 2002).
Because the Transfers in question here crucially involve third-parties–Lincoln
Hospital and the Clinics–who clearly received the direct benefit of Biomar’s software goods and
services, this Court must determine the value of any indirect benefit flowing to the Debtors for
the payments made to benefit the third-parties. “If the debtor directly receives value for the
transferred property, the court only needs to compare the value received with the value given
up by the debtor.” Newtowne, 157 B.R. at 378.
Where, as here, the Transfers involve third-parties, the analysis is more complicated,
“because the benefit to the debtor may be harder to trace.” Id. In measuring the value of any
benefits received, “[t]he focus always is on the economic benefit, if any, flowing to the debtor as
a result of the transfer.” Id. at 379 (internal citations omitted). In fact, as a general rule, courts
have held that “the debtor must receive the value of the transfer, not some third party.” See
Yoder v. T.E.L. Leasing, Inc. (In re Suburban Motor Freight, Inc.), 124 B.R. 984, 997 (Bankr.
S.D. Ohio 1990).
Judge Sellers in Newtowne identified the three situations in which courts have found that
a debtor received reasonably equivalent value in a third-party transfer. First, there is the
situation where the debtor’s payment of a third-party’s debt discharges the debtor’s own debt to
the third-party. See Newtowne, 157 B.R. at 379. However, in the situation where no
corresponding obligation of the transferor is discharged, courts have not hesitated to avoid
transfers made to satisfy the debt of a third party. See, e.g., Dietz v. St. Edward's Catholic
Church (In re Bargfrede), 117 F.3d 1078, 1079-80 (8th Cir. 1997) (debtor’s transfer to church to
pay debt of embezzling wife avoidable). That is not the case here, as NCFE did not owe either
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Lincoln Hospital or the Clinics a debt that could be discharged by NCFE’s payments to
Biomar—to the contrary, they were indebted to the Debtors for millions of dollars.
Second, there is the situation where the “debtor and the third party are so related or
situated that they share an identity of interests because what benefits one will, in such a case,
benefit the other to some degree.” Newtowne, 157 B.R. at 379 (quoting Pembroke Dev. Corp. v.
Commw. Sav. & Loan (In re Pembroke Dev. Corp.), 124 B.R. 398, 400 (Bankr. S.D. Fla. 1991)).
This scenario also does not apply. Although Lincoln Hospital was indirectly owned by the four
NCFE founders, NCFE itself had no ownership interest in either Lincoln Hospital or the Clinics.
There is no value to NCFE’s creditors for payments that may have benefitted the founders’ other
business interests.
Finally, “where a debtor enjoys the benefits of the goods or services it bought for its
principal, the transfer of money for those goods or services may not be avoided.” Newtowne, 157
B.R. at 379; see also, e.g., Butz v. Sohigro Serv. Co. (In re Evans Potato Co.), 44 B.R. 191, 194
(Bankr. S.D. Ohio 1984) (debtor received reasonably equivalent value when it paid for goods
ordered by owner because goods were delivered to debtor and debtor had exclusive use of
goods). The Court must undertake an analysis of whether this third category of indirect benefits
that Judge Sellers described applies to the case at bar. Even though the software was not
installed at NCFE and was not used by NCFE employees in the operation of NCFE’s business,
Biomar still argues that NCFE received value from the Transfers since NCFE enjoyed the
benefits of Biomar’s systems installed at Lincoln Hospital and one Clinic. Conversely, Plaintiff
argues persuasively that NCFE received nothing of concrete or quantifiable value from Biomar
in exchange for the Transfers.
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8In Dayton Title, Judge Clark held that the defendants did not attempt to measure or quantify
the economic value of the plaintiff title agency’s continued relationship with Chari, a real estate
broker. Instead, defendants only speculated, without evidentiary support, that the value of Dayton
Title’s ongoing relationship with Chari was reasonably equivalent to the $4,142,151.38 loss
experienced by Dayton Title (when Chari transferred this money to defendants from title agency’s
trust account) forcing it to close its doors and seek bankruptcy protection. See id. Judge Clark
found this assertion too speculative to merit consideration. Consequently, Judge Clark concluded
that the plaintiff title agency received no reasonably equivalent direct or indirect benefit for the
$4,142,151.38 transferred to defendants. See id.
26
The Court notes that “courts have been willing to consider indirect benefits received by a
debtor [but only] if those benefits are fairly concrete.” Harker v. Ctr. Motors, Inc. (In re
Gerdes), 246 B.R. 311, 314 (Bankr. S.D. Ohio 2000) (emphasis added). In Dayton Title, Judge
Clark reiterated this point from Gerdes, stating “the economic value of any indirect benefits must
be fairly concrete and quantifiable to merit consideration by the court.” Dayton Title, 292 B.R.
at 875 (citing SPC Plastics Corp. v. Griffith (In re Structurelite Plastics Corp.), 224 B.R. 27, 31
(B.A.P. 6th Cir. 1998) (noting that the speculative value of indirect benefits like the opportunity
to acquire additional loans or new managerial talent does not constitute fair consideration) (other
citation omitted). 8 See also Clark v. Sec. Pac. Bus. Credit (In re Wes Dor, Inc.), 996 F.2d 237,
243 (10th Cir. 1993) (“To the extent indirect benefits could be considered . . . the Bank fails to
point to any evidence quantifying the amount of such benefits.”); Stillwater Nat’l Bank and Tr. v.
Kirtley (In re Solomon), 299 B.R. 626, 638 (B.A.P. 10th Cir. 2003) (finding that indirect benefits
that cannot be quantified do not constitute “value,” under constructive fraudulent transfer
provisions of Oklahoma law or the Bankruptcy Code); Pummill v. Greensfelder, Hemker & Gale
(In re Richards & Conover Steel, Co.), 267 B.R. 602, 613 (B.A.P. 8th Cir. 2001) (“If the benefits
are indirect, they must be ‘fairly concrete.’” (citation omitted)); Official Comm. of Unsecured
Creditors of Crystal Med. Prods., Inc. v. Pedersen & Houpt (In re Crystal Med. Prods., Inc.),
240 B.R. 290, 300 (Bankr. N.D. Ill. 1999) (same); Coan v. Fleet Credit Card Servs., Inc. (In re
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27
Guerrera), 225 B.R. 32, 36 (Bankr. D. Conn. 1998) (To constitute “reasonably equivalent value”
for alleged fraudulent transfer in payment of third party’s debt “any indirect benefit received
must be ‘fairly concrete.’” (quoting Leibowitz v. Parkway Bank & Trust Co. (In re Image
Worldwide, Ltd.), 139 F.3d 574, 578 (7th Cir. 1998)).
a. 	Burden of Production to Show Indirect Benefit
Before analyzing what indirect benefits NCFE received, if any, in exchange for the
Transfers, the Court turns to the allocation of the burden of production on this issue. In a three-
way transfer like this one, once the plaintiff has shown that the transfer was for the benefit of a
third-party, as Plaintiff here has done, courts place the burden on the defendant to prove that the
debtor received “reasonably equivalent value” indirectly as a result of the transfer. In First Nat’l
Bank in Anoka v. Minn. Utility Contracting, Inc. (In re Minn. Utility Contracting, Inc.), 110 B.R.
414, 419 (D. Minn. 1990), the court affirmed the decision of the bankruptcy court shifting the
burden of production onto the defendant in a third-party transfer context. The defendant had
argued that the bankruptcy court erred in shifting the ultimate burden of proof of “reasonably
equivalent value” onto the defendant. The court disagreed, noting that the plaintiff had satisfied
its burden by proving that it did not receive a direct benefit for the transfers—once established,
the defendant must meet that proof with evidence of an indirect benefit to the plaintiff:
While the bankruptcy court did state that it was placing the
“burden of proof regarding equivalent value” on the Bank, it later
explained this statement when it said that it was placing upon the
trustee the burden of producing evidence that it did not receive
“direct” consideration, and then shifting to the Bank the burden to
prove that Leasing received indirect consideration. Thus, it is
clear that the bankruptcy court never truly shifted the ultimate
burden of proof on the issue to the Bank. Rather, it required the
debtor to produce evidence that it received no direct benefit for
the pledge of assets. Leasing having done so by showing that the
loan proceeds went to a third party, the bankruptcy court then
required the Bank to meet this evidence with some proof that
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Leasing received an indirect benefit from the loan.
Id. at 419 (emphasis in original). The court then rejected the defendant’s argument that “since,
at the time of the transfer Contracting [the third-party beneficiary] accounted for most of
Leasing’s [the transferor’s] business, the infusion of additional cash into Contracting necessarily
generated additional business for Leasing, and this additional business constituted reasonably
equivalent value for the pledge.” Id. at 420. In a ruling that is particularly instructive in this
case, the district court held that the “promise of continued business” between the transferor and
the third party beneficiary was not sufficient, as the defendant had produced “‘no evidence that
the advance did in fact result in additional business to Leasing, or, if so, how much additional
business.’” Id. (citation omitted).
Many courts have followed Minn. Utility, holding that once a plaintiff has established
that consideration for the transfer passed to a third-party, the burden of demonstrating and
quantifying reasonably equivalent value for the transfer shifts to the defendant. See, e.g., Wes
Dor, 996 F.2d at 243 (noting defendant “fails to point to any evidence quantifying the amount of
such [indirect] benefits”); Braunstein v. Walsh (In re Rowanoak Corp.), 344 F.3d 126, 131-32
(1st Cir. 2003) (“[o]nce the Trustee establishes his prima facie case, he need not affirmatively
disprove every other potential theory”) (affirming district court’s finding third-party transfers
fraudulent in absence of documentation of loan); Richards & Conover Steel, 267 B.R. at 614
(“party claiming to have delivered value must quantify it.”); Commerce Bank of Kansas City,
N.A. v. Achtenberg 1993 WL 476510, *3 (W.D. Mo. Nov. 10, 1993) (“[T]he court’s rationale in
Minnesota Utility is well reasoned and fully supported by other courts and commentators
interpreting § 548(a)(2).”); Dayton Title, 292 B.R. at 875 (“[w]hile goodwill and the
continuation of business relationships can be indirect benefits to a business debtor, [the
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29
defendants] have not attempted to measure or quantify the economic value of Dayton Title’s
continued relationship with Chari.”); Leonard v. Mountainwest Fin. Corp. (In re Whaley), 229
B.R. 767, 775 (Bankr. D. Minn. 1999) (where immediate benefit from transfer goes to third
party, burden shifts to transferee to show debtor received indirect benefit that was “both tangible
and of concrete economic value”); Leonard v. First Commercial Mortgage Co. (In re Circuit
Alliance, Inc.), 228 B.R. 225, 231 (Bankr. D. Minn. 1998) (when trustee establishes transfer was
made on account of third party’s debt or obligation, burden shifts to defendant to demonstrate
debtor received benefit that was “tangible, of concrete economic value, and reasonably
equivalent to what the debtor gave up.”); Leonard v. Norman Vinitsky Residuary Trust (In re
Jolly’s Inc.), 188 B.R. 832, 843 (Bankr. D. Minn. 1995) (once proven that consideration for
transfer went directly to third party, defendant seeking shelter of “indirect benefit” defense bears
“‘intermediate’ burden of production as to the concreteness of the indirect benefit, and its
reasonable equivalence in value.” (emphasis in original)); Newtowne, 157 B.R. at 380
(“[defendant] neither suggested nor presented evidence establishing any genuine factual issue of
economic benefit to Enwotwen as a result of the transfer of the Property.”).
The Court finds that Plaintiff satisfied its initial burden of proof by proving that NCFE
did not receive reasonably equivalent value by showing that the consideration for the Transfers
went directly to third-parties Lincoln Hospital and the Clinics. See Dayton Title, 292 B.R. at
875. Moreover, Plaintiff went beyond its burden by affirmatively proving that NCFE did not
receive reasonable equivalent value by showing that although Lincoln Hospital’s indebtedness to
NCFE subsidiaries increased by approximately $27 million after the Transfers began in 2001, the
collections flowing into Lincoln Hospital’s lockbox did not increase, and the eligible receivables
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that NCFE could purchase from Lincoln Hospital also did not change materially. See Vol. I at
47-50, 80-86.
The undocumented “promise to pay” by Lincoln Hospital to NCFE also did not constitute
a benefit to NCFE. Even if NCFE did receive an undocumented “promise to repay” from
Lincoln Hospital, this promise was worthless due to Lincoln Hospital’s own insolvency at the
time, a fact well known to Biomar, as shown by Mr. Martia’s insistence that NCFE agree to pay
Biomar instead of having Lincoln Hospital do so. Courts have held that transfers made to benefit
an insolvent third-party do not offer the possibility of providing reasonably equivalent value to
the transferee. Any “promise to pay” offered by Lincoln Hospital to NCFE did not offer a
legitimate and reasonable chance of return and was thus of no value. See, e.g., Cent. Bank of
Cleveland v. Coleman (In re B-F Bldg. Corp.), 312 F.2d 691, 694 (6th Cir. 1963) (“worthless”
demand promissory note issued by insolvent entity did not provide reasonably equivalent value).
See also Frank v. Kiesel (In re Denison), 292 B.R. 150, 154 (E.D. Mich. 2003) (“[A] future
return on an investment could constitute ‘reasonably equivalent value’ for the initial purpose,
[but] there must be some ‘legitimate and reasonable’ chance of return.” (quoting Mellon Bank,
N.A. v. Official Comm. of Unsecured Creditors of R.M.L. (In re R.M.L., Inc.), 92 F.3d 139, 152
(3rd Cir. 1996)).
Thus, Biomar bears the burden of production to show that NCFE received a concrete,
quantifiable, and tangible indirect benefit that was reasonable equivalent to the $608,000.00 cash
value of the Transfers. This is a burden that Biomar has failed to satisfy.
b. 	NCFE did not Receive Concrete, Quantifiable Indirect Benefits that
were Reasonably Equivalent to the Transfers
The Court finds that Biomar failed to meet its burden of production to prove that NCFE
received an indirect benefit from the Transfers that was concrete, quantifiable and reasonably
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equivalent in value to the Transfers. In fact, Biomar provided no evidence of any concrete
quantifiable benefit to NCFE. Although Mr. Martia and Mr. Speer did their utmost to extol the
virtues of the Biomar system and to speculate about potential advantages the software might
have yielded at some unspecified future date, Biomar never identified a single dollar’s worth in
value that returned to NCFE as a result of its payments to Biomar—let alone $608,000.00 worth.
Reviewing Biomar’s evidence and witnesses, Mr. Speer discussed the financial impact
that the Biomar system may have had upon NCFE. When asked if there were positive trends in
the receivable amounts following the installation of the Biomar system at Lincoln Hospital,
Mr. Speer answered affirmatively, but he prefaced that answer stating, “I didn’t do any follow-
up work to determine independently that the information was accurate.” Vol. III at 83. Then he
qualified his answer stating, “I didn’t do any deep analysis. I didn’t perform any diligence or
background work with respect to the numbers.” Id. 	This testimony hardly qualifies as concrete
or quantifiable.
Biomar provided no evidence—testimonial or documentary—to the Court demonstrating
concrete quantifiable numbers to show that the Biomar system enabled NCFE to purchase more
receivables from Lincoln Hospital, which would naturally increase NCFE’s revenues through
increased finance fees. Mr. Speer merely testified that NCFE’s revenues would have increased
due to the Biomar installation at Lincoln; he failed to testify as to the amount those revenues
would have increased. Mr. Speer even admitted in his deposition that no analysis was ever done
on the impact that the Biomar system had on NCFE’s bottom line. See Vol. III at 137-38.
After being questioned by counsel for Plaintiff concerning his deposition testimony,
Mr. Speer admitted that the Biomar system’s impact on NCFE’s finances “still remains to be
seen.” Id. at 138. Mr. Speer also emphasized that NCFE had a better database with more
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9Mr. Speer also speculated that an enhanced database with patient and billing information
had some unspecified value to third parties. See Vol. III at 138-39. Plaintiff points out that even
this vague claim could be dubious given that marketing a huge database of confidential medical
information could run afoul of the Health Insurance Portability and Accountability Act of 1996
(“HIPAA”), Pub. L. 104-191, and its related privacy rule, 65 F.R. 82462, which impose strict
limitations on the disclosure of individually identifiable medical information.
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complete data due to the Biomar system, but again he hedged on its impact saying, “[w]hether
that actually brought value to NCFE at a later date is a question for a later date, and clearly
would never be answered at this point.” Id. at 139. 9
Upon questioning by the Court, Mr. Speer continued to sidestep the issue of the Biomar
system’s impact on NCFE’s revenues. When asked if the eligible receivables that NCFE could
actually purchase from Lincoln Hospital increased (which would also add to NCFE’s revenues
through heightened fees) after the installation of the Biomar system, Mr. Speer said “[t]hat
answer was a little more complex because it depends on the circumstances.” Vol. III at 172-73.
Mr. Speer also said that NCFE’s revenues would have increased “in theory” as a result of the
Biomar system; plus, he was not sure of the impact the system would have had on the percentage
of receivables collected. See id. at 174-76. In all, Mr. Speer’s testimony consists of vague,
nebulous answers that depend on circumstances, some of which will be determined at a later
time. Mr. Martia’s testimony can be similarly characterized as puffery without detail.
In fact, even in its post-trial brief, Biomar put forth the same unpersuasive position that
NCFE likely would have received vague and amorphous benefits, at some undetermined future
time, as a result of the Transfers. See Docs. 86, 91 (presenting no citation to the record of
concrete, quantifiable benefits that accrued to NCFE as a result of the Transfers). 	Overall,
based on all the filings before the Court and record evidence adduced at trial, the Court
determines that Biomar presented no evidence that the installation of its system at Lincoln
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10 Biomar’s assertion that it is entitled to a good faith defense lacks merit because Biomar did
not give value to NCFE for the Transfers, and Biomar knew that the Transfers came from NCFE and
not Lincoln Hospital or the Clinics. The “good faith” defense only protects transferees who “take
for value and in good faith.” To be entitled to the “good faith” protection, the transferee must give
value to the debtor. 	See 11 U.S.C. § 548(c) (“[A] transferee or obligee of such a transfer or
obligation that takes for value and in good faith has a lien on or may retain any interest transferred
or may enforce any obligation incurred, as the case may be, to the extent that such transferee or
obligee gave value to the debtor in exchange for such transfer or obligation. (emphasis added)); see
also Klein v. Klein (In re Klein), 1991 WL 242169, *16 (Bankr. N.D. Ill. June 21, 1991) (finding
the good faith defense inapplicable because the defendants did not take in good faith and did not
give value to the debtor for the transfer.).
.
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Hospital or at the single Clinica Medica Familiar site provided any concrete, quantifiable or
tangible indirect economic benefit to NCFE.10 Thus, Biomar failed to meet its burden under the
standard imposed by Judge Clark and other courts that the “economic value of any indirect
benefit must be fairly concrete and quantifiable to merit consideration by the court.” Dayton
Title, 292 B.R. at 875. 	In the final analysis, Biomar’s speculations of vague and intangible
indirect benefits to NCFE is unavailing to the Court. The Transfers left NCFE’s cash account
prior to its Chapter 11 filing and went to Biomar. Nothing of any concrete value to NCFE’s
creditors ever returned.
The Court finds that Plaintiff has shown that the Debtors received “less than a reasonably
equivalent value” in return for the Transfers to Biomar. Thus, Plaintiff has proved the second
element of its claim for avoidance of the Transfers.
3. 	NCFE Was Insolvent at the Time of the Transfers
Biomar contested insolvency, but it did not offer any affirmative evidence that NCFE
was solvent at the time of the Transfers. At trial, Plaintiff called Jeffrey Benton, a CPA and
managing director of FTI Consulting, one of the professionals this Court appointed to represent
the Debtors post-petition, to testify concerning the Debtors’ true financial condition at the time
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of the Transfers. See Vol. I at 129-32. Mr. Benton described the work he had done in restating
the Debtors’ financial statements in order to seek tax refunds. See id. at 133-45. Mr. Benton
testified that the financial statements prepared by the company pre-petition overstated the value
of NPF XII’s receivables by around $2 billion to $2.5 billion. See id. at 134-35. Moreover, the
pre-petition 2001 consolidated financial statement erroneously reflected NCFE as having a
positive shareholder equity of approximately $93 million, mostly as a result of an asserted
investment value of $185 million in its subsidiaries, NPF VI and NPF XII. See id. at 137.
However, when the actual value of NCFE’s ownership interests in NPF VI and NPF XII were
taken into account, through a write-down of around $2.4 billion in worthless receivables,
NCFE’s investment in subsidiaries was actually zero, meaning that, as of December 31, 2001,
NCFE was insolvent. See id. at 139-40.
Similarly, Mr. Benton testified that the company’s pre-petition consolidated financial
statement for 2000 was also erroneous and, when restated, revealed that NCFE was already
insolvent by over $100 million as of December 31, 2000. See id. at 142. In short, Mr. Benton
testified that NCFE, NPF VI, NPF X and NPF XII were all insolvent on a balance sheet basis
from at least December 31, 2000 continuously through the Petition Date. See id. at 143-44.
Thus, Plaintiff has proved the third and final element of its claim for avoidance
of the Transfers. Accordingly, the Court finds that the Transfers were fraudulent and are
avoidable under 11 U.S.C. § 548(a)(1)(B).
Plaintiff is also entitled to recover the Transfers under 11 U.S.C. § 550(a)(1) from
Biomar because it is undisputed that Biomar was the initial and only transferee of the Transfers.
Accordingly, the Court will enter judgment for the Plaintiff and against Biomar in the amount of
$608,000.00, plus costs and interest.
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11 The Court notes that Mr. Martia testified under oath that certain Biomar invoices had been
paid, and also identified a contemporaneous document created by Biomar showing that certain
Biomar invoices had been paid, yet Mr. Martia submitted a proof of claim, under penalty of perjury,
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C. 	Objection to Biomar’s Claim
Biomar asserts in its amended proof of claim that it is owed $315,000.00 for monthly
maintenance fees provided to the Clinics and $180,000.00 for a software license and services
provided to VillaView. See Vol. II at 133. Biomar argues that its claim should be allowed
because it actually performed those services reflected in invoices sent to NCFE. This, however,
does not establish a valid and enforceable obligation on NCFE to pay for those alleged services.
See 11 U.S.C. § 502(b)(1).
NCFE did not agree to pay Biomar for the monthly maintenance fees for the
Clinics, as Mr. Martia admitted under oath: “I believe the monthly maintenance fee was
supposed to be paid by the clinics.” Vol. II at 46; see also Plaintiff’s Ex. 8; Vol. I at 87, 89, 209;
Vol. II at 55, 77, 79. In fact, the testimony establishes that the software was not even installed
and in operation at the Clinics at the time the monthly maintenance fees were supposedly
incurred. See Vol. II at 10-11; Vol. III at 52.
Similarly, the testimony establishes that NCFE did not agree to pay Biomar for a
software license and services for VillaView. See Vol. I at 87, 213-14; Vol. III at 62-63, 123-24.
NCFE never made any payments to Biomar for work done to benefit VillaView. See Vol. I at
68; Vol. II at 6-7. Also, VillaView never agreed to the installation of the Biomar system. See
Vol. III at 123. And, in fact, the Biomar system was never installed at VillaView. See Vol. II at
4; Vol. III at 123. Further, as detailed in Biomar’s post-trial brief, Mr. Martia and Mr. Speer
admitted that NCFE never actually agreed to pay for any of the services Biomar now claims to
have performed without compensation. See Doc. 86 at 17.11
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stating that the invoices in question were unpaid and were due and owing, and in an answer to
verified interrogatories identified the invoices attached to the proof of claim as detailing all the
payments to which Biomar was asserting an entitlement. 	Mr. Martia’s explanation that he
overlooked his own documentation stating that the invoices were paid at the time he assembled
his proof of claim was not credible in the Court’s eyes. See Plaintiff’s Ex. 5, 15, 16; Vol. II at 108-
11, 120-22, 127-28, 131-32.
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The Court simply has no evidence at all that NCFE incurred an obligation to pay Biomar
the amounts sought in the amended proof of claim. For this reason the Court will sustain
Plaintiff’s objection to Biomar’s claim.
Additionally, even had NCFE in fact incurred any obligation, such obligation would also
be avoidable as a fraudulent transfer under 11 U.S.C. § 548(a)(1)(B) because reasonably
equivalent value was not given to NCFE in exchange for the obligation. NCFE received no
reasonably equivalent value in return for the amount of Biomar’s amended proof of claim. Only
one Clinic went live (with no concrete quantifiable effect on NCFE) and the Biomar system was
never installed at VillaView.
For these reasons, the Court disallows Biomar’s proof of claim in its entirety.
V. Conclusion
For the foregoing reasons, the Court, in a separate entry, will (1) grant judgment in favor
of Plaintiff and against Biomar for fraudulent transfers in the amount of $608,000.00; (2) sustain
Plaintiff’s objection to claim and disallow Biomar’s amended proof of claim in its entirety; and
(3) award Plaintiff its costs,
IT IS SO ORDERED.
Copies to:
Service List in this Adversary Proceeding
# # #
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