Rutherford Hospital v. RNH Partnership ( 1999 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
RUTHERFORD HOSPITAL,
INCORPORATED,
Plaintiff-Appellant,
No. 98-1199
v.
RNH PARTNERSHIP,
Defendant-Appellee.
Appeal from the United States District Court
for the Western District of North Carolina, at Shelby.
Max O. Cogburn, Magistrate Judge.
(CA-96-327-4-C)
Argued: October 28, 1998
Decided: February 5, 1999
Before MURNAGHAN and WILLIAMS, Circuit Judges, and
BLAKE, United States District Judge for the
District of Maryland, sitting by designation.
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Affirmed by published opinion. Judge Blake wrote the opinion, in
which Judge Murnaghan and Judge Williams joined.
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COUNSEL
ARGUED: Joseph Branch Craige Kluttz, KENNEDY, COVING-
TON, LOBDELL & HICKMAN, L.L.P., Charlotte, North Carolina,
for Appellant. Maureen Demarest Murray, SMITH, HELMS, MUL-
LISS & MOORE, L.L.P., Greensboro, North Carolina, for Appellee.
ON BRIEF: Kiran H. Mehta, Sara W. Higgins, KENNEDY, COV-
INGTON, LOBDELL & HICKMAN, L.L.P., Charlotte, North Caro-
lina, for Appellant. Terrill Johnson Harris, SMITH, HELMS,
MULLISS & MOORE, L.L.P., Greensboro, North Carolina, for
Appellee.
_________________________________________________________________
OPINION
BLAKE, District Judge:
In December 1996, Rutherford Hospital, Inc. ("Rutherford"), filed
a declaratory judgment action in federal district court seeking a ruling
that it owns "all right, title and interest in the appropriate license and
approval for all beds necessary to operate" the Woodlands Skilled
Nursing Center (formerly known as the Rutherford Nursing Center).
J.A. 12. Rutherford currently operates the nursing home under two
leases from RNH Partnership ("RNH"), which owns all of the facili-
ty's property, structures, and equipment. The district court denied
Rutherford's claim, finding that "upon expiration of the leases, [Ruth-
erford] has no rights whatsoever to own or operate the nursing facility
or nursing beds." J.A. 555-56. For reasons different from those relied
upon by the district court, we affirm.
I.
The Woodlands Skilled Nursing Center is located in Rutherfordton,
North Carolina, and was built by RNH in the late 1970s. The original
operator of the facility was a company named ISO, Inc. ("ISO"). ISO
operated the nursing home under two leases it signed with RNH in
July 1977. The leases, which later were acquired by Rutherford, are
scheduled to expire in April 2000 and cover the facility's real and per-
sonal property. RNH and ISO obtained all necessary federal and state
authorizations to construct and operate the nursing home. Rutherford
acknowledges that these various authorizations "imply no property
rights in the nature of an exclusive franchise for operation of a medi-
cal facility." Ruth. Br. 11.
ISO operated the nursing home until 1988, when it filed a volun-
tary petition for bankruptcy in the United States Bankruptcy Court for
2
the Middle District of North Carolina. As part of the bankruptcy pro-
ceedings, in June 1988 the bankruptcy court approved the sale of
ISO's interests in four nursing homes that ISO owned or operated,
including the Woodlands Skilled Nursing Center (then known as the
Rutherford Nursing Center). A copy of the bankruptcy court's order
and Notice to Interested Parties was mailed to Rutherford along with
forty other potential buyers. In the notice, the Rutherford Nursing
Center was identified as a 150-bed facility "leased" by ISO through
the year 2000 with "no extensions." J.A. 1246. In contrast, ISO's
interests in two other nursing homes that it operated were identified
as "fee simple" ownership. Id. In addition to the Notice to Interested
Parties, ISO prepared and distributed a "prospectus" describing the
four nursing homes. With respect to the Rutherford Nursing Center,
the prospectus indicated that "[t]he facility and land are owned by
RNH Partnership of Glenview, Illinois. The operations and facility
are leased by ISO, Inc. d/b/a/ Rutherford Nursing Center on a straight
20 year lease expiring on April 1, 2000." J.A. 1799.
At the ensuing auction, Rutherford was the highest bidder for
ISO's interest in the Rutherford Nursing Center. To complete the
transaction, Rutherford and ISO entered into an Agreement of Sale
and Purchase dated August 8, 1988. The Agreement stated that
"Seller and Buyer desire to enter into this Agreement whereby Buyer
is to purchase the leases hereinafter described, and consisting of a
nursing home building designed for 150 beds located thereon and
known as `RUTHERFORD NURSING CENTER', together with
related personal property, under the terms and conditions hereinafter
set forth." J.A. 1129. More specifically, under the heading "Purchase
and Sale," the Agreement purported to convey the following three
items to Rutherford:
A. The Lease from RNH Partnership to ISO, Inc. for the
nursing facility and surrounding lands as referenced in
Lease dated July 22, 1977 and expiring April 1, 2000.
B. The Lease for personal property located in said nursing
facility, dated July 22, 1977 between RNH Partnership and
William L. Rambo [ISO's principal], with the exception of
certain medical supplies and perishable goods, with said
Lease expiring April 1, 2000.
3
C. All right, title and interest in Certificate of Need issued
by the North Carolina Department of Human Resources,
Division of Facility Services, dated March 18, 1976, under
# C-0525-76, including the appropriate license and approval
for all beds necessary to operate the Rutherford Nursing
Center; all rights to the trade name Rutherford Nursing Cen-
ter.
J.A. 1130.
The validity of the conveyance of the real and personal property
leases (sections A and B above) is not disputed by RNH. See RNH
Br. 31-32. Rather, the controversy in this case centers around the
meaning and significance of section C, which apparently was
intended to transfer from ISO to Rutherford the state-mandated "cer-
tificate of need" (explained below) that allegedly had been issued for
the nursing home in 1976. In fact, the parties agree that no certificate
of need relating to the nursing home had ever been issued to RNH or
ISO or to any other party. See Ruth. Br. 13; RNH Br. 9; J.A. 541. The
certificate or license referred to in section C simply did not (and does
not) exist.1
On September 20, 1988, the bankruptcy court entered its order con-
firming the sale of ISO's interest in the Rutherford Nursing Center to
Rutherford, "subject to the terms and conditions of the Asset Purchase
Agreement." J.A. 1288. The order specified that"the Assets to be
conveyed include a real property lease and an equipment lease
between ISO, Inc. and RNH Partnership (dated July 22, 1977 and
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1 It is worth noting that section C is the only part of the sales agreement
between ISO and Rutherford that mentioned a "certificate of need."
Other relevant provisions of the sales agreement referred only to the two
leases. For example, part 2 of the agreement stated that "[t]he purchase
price to be paid by the Buyer to the Seller for the Leases shall be
[$810,000]." J.A. 1130. Part 6 of the agreement stated that "Seller has
full power and authority to enter into this Agreement and to convey,
transfer and assign the Leases in accordance with the terms hereof" and
that "THE LEASES ARE BEING SOLD AS IS." J.A. 1131. And part 15
of the agreement specified that at closing, "Seller shall deliver to Buyer
the . . . Assignment of Leases herein referenced." J.A. 1134.
4
expiring April 1, 2000), which leases have been assumed by the
Debtor ISO, Inc. and which are being assigned to the purchaser in
accordance with an order approving Debtor's assignment of Leases
entered simultaneously with this Order." J.A. 1287-88. The order
made no reference to any certificate of need for the facility.
In early 1992, a conversation between the new administrator of the
nursing home and an industry consultant prompted Rutherford to
inquire as to the status of the certificate of need ("CON") for the facil-
ity. In March 1992, in response to Rutherford's inquiry, the North
Carolina Department of Human Resources, Certificate of Need Sec-
tion ("Department"), informed Rutherford that"ownership of the
home and the ownership of the CON resides with the owner of the
facility" and that following the expiration of Rutherford's leases with
RNH, RNH "would retain the CON." J.A. 2018. 2 Concerned about
which party possessed the ongoing authority to operate the nursing
home, in July 1995 Rutherford filed a declaratory judgment action in
the Superior Court for Rutherford County, North Carolina, against
both RNH and the Department. That suit ultimately was dismissed for
lack of subject matter jurisdiction due to Rutherford's failure to
exhaust its state administrative remedies. Rutherford and the Depart-
ment subsequently reached a settlement.3
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2 The Department mistakenly believed that a certificate of need had
been issued for the facility.
3 In the Settlement Agreement, dated December 6, 1996, the Depart-
ment "t[ook] no position concerning the effect of the Sale Order" entered
by the bankruptcy court in September 1988. J.A. 294. The Department
agreed to be bound, however, by the following provision:
Given the unique circumstances of this case, the Department
stipulates and agrees that if a court of competent jurisdiction
declares that RNH is barred or otherwise estopped from denying
that [Rutherford] owns all right, title, and interest in the appro-
priate license and approval for the beds necessary to operate the
Nursing Facility, then [Rutherford] is vested with the exclusive
right to own and maintain the beds in question, notwithstanding
expiration of the lease in question in April 2000, and is "grandfa-
thered" with respect to such rights under the Certificate of Need
Law.
J.A. 296.
5
Rutherford filed the present suit in the United States District Court
for the Western District of North Carolina in December 1996. Ruther-
ford is seeking a declaratory judgment that RNH"is forever barred
from asserting that [Rutherford] does not own all right, title and inter-
est in the appropriate license and approval for all beds necessary to
operate the Nursing Home, including any Certificate of Need or
equivalent authorization, free and clear of all liens, claims and inter-
ests of [RNH] or any other party." J.A. 12. The basis for Rutherford's
claim is the purported sale, confirmed by the bankruptcy court, of the
"license and approval" required to operate the nursing home as set
forth in section C of the August 1988 sales agreement between Ruth-
erford and ISO. See Ruth. Br. 19-20, 25-26.
After a two-day bench trial, the district court 4 ruled in favor of
RNH, finding that Rutherford's only interest in the nursing home is
"to operate and use the nursing facility and personal property for the
terms of the leases." J.A. 552. In reaching its decision, the court
apparently accepted Rutherford's position that "assets other than the
leases with ISO" relating to RNH's "right to operate the beds after the
expiration of the leasehold" existed at the time of the bankruptcy sale
and were intended to be transferred to Rutherford by operation of the
August 1988 sales agreement between Rutherford and ISO. J.A. 549,
551. The court refused to accord finality to the bankruptcy court's
order confirming the sale as to these assets, however, because it con-
cluded that RNH had not received proper notice "reasonably calcu-
lated under all the circumstances of this case to apprise [RNH] of
such conveyance and afford it an opportunity to object." J.A. 551.5
Rutherford now appeals.
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4 Magistrate Judge Max O. Cogburn exercised jurisdiction in the case
pursuant to 28 U.S.C. § 636(c).
5 RNH acknowledges that it received a copy of Rutherford's motion to
confirm the sale of ISO's interest in the nursing home prior to entry of
the bankruptcy court's order, RNH Br. 11, but it interposed no objection
to the sale. Nonetheless, in denying Rutherford's requested declaratory
relief, the district court found that "neither the Sale Agreement nor the
order confirming sale provided [RNH] with reasonable notice that its
assets were in jeopardy of being conveyed to another party without com-
pensation." J.A. 549. Since, as explained in part II of our opinion, we
affirm the district court's decision on the alternate grounds that because
no certificate of need was in existence at the time of the sale, one could
not have been conveyed by ISO to Rutherford, it is unnecessary for the
court to address further the question of whether RNH received proper
notice of the bankruptcy sale.
6
II.
We review the district court's findings of fact for clear error and
its conclusions of law de novo. Richman v. First Woman's Bank
(Matter of Richman), 104 F.3d 654, 656 (4th Cir. 1997). We may
affirm the district court's judgment on any grounds raised by the par-
ties below. Nyonteh v. Peoples Sec. Life Ins. Co., 958 F.2d 42, 45 (4th
Cir. 1992) (per curiam). Because we conclude that the assets con-
veyed to Rutherford as a result of the 1988 sale confirmed by the
bankruptcy court did not include a certificate of need for the Ruther-
ford Nursing Center (now known as the Woodlands Skilled Nursing
Center), we affirm the district court's declaration that Rutherford
"owns the right, title, and interest to operate and use the nursing facil-
ity and personal property for the terms of the leases, [but that] upon
expiration of the leases, has no rights whatsoever to own or operate
the nursing facility or nursing beds." J.A. 555-56.
It is the public policy of North Carolina to regulate the construction
and operation of health care facilities. See N.C. Gen. Stat. § 131E-175
et seq. (describing "certificate of need" requirements). Accordingly,
any person proposing the development and provision of "new institu-
tional health services," including certain changes in existing services,
is required by law to obtain a "certificate of need" from the state
before going forward with the project. See id. §§ 131E-178 & -190.
Each certificate of need is particularized as to the person to whom and
the project for which permission to build and offer health care ser-
vices is granted. See id. § 131E-181. In essence, a certificate of need
is a special kind of license needed to construct and operate any "new"
health care facility in North Carolina. See id. § 131E-176(16) (defin-
ing "new institutional health services"). 6
The certificate of need law does not apply, however, to projects
which received the requisite federal approval prior to January 1, 1979,
and on which construction commenced before January 1, 1980. In re
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6 We think that Rutherford's characterization of the certificate of need
statute as establishing "a system of state[ ]-mandated franchises for oper-
ation of health care facilities," Ruth. Br. 12, is off the mark. A certificate
of need is more akin to a traditional business license or construction per-
mit than to a franchise agreement.
7
Wilkesboro, Ltd., 55 N.C. App. 313, 315-16 (1982). The nursing
home at issue in this case was exempted from the law's requirements
under this "grandfather" provision. Furthermore, no certificate of need
is required simply to continue operating a nursing home, unless cer-
tain types of changes are made in any of its facilities, equipment, or
services. See N.C. Gen. Stat. § 131E-176(16). The mere expiration of
a lease agreement pursuant to which one party manages a nursing
home owned by another is not one of the qualifying changes listed in
the statute. See id. Thus, so long as no qualifying changes are made
to the Woodlands Skilled Nursing Center following the expiration of
Rutherford's leases with RNH, no certificate of need will be required
to continue operating the facility in the future.
The central question that Rutherford's declaratory judgment action
seeks to answer is whether it or RNH owns the future"operating
rights" for the nursing home, separate and apart"from the rights
encompassed by the two Leases." See Ruth. Br. 3, 20. In answering
this question, the main point that the parties and the district court
seem to have lost sight of is the undisputed fact that no certificate of
need pertaining to the Rutherford Nursing Center was ever issued to
RNH, ISO, or to any other party. Furthermore, no certificate of need
has since been issued for its successor, the Woodlands Skilled Nurs-
ing Center. Since no certificate of need for the nursing home existed
as of the date of the bankruptcy court's sale of ISO's assets to Ruther-
ford, Rutherford could not have acquired, and does not now possess,
such a license for the facility.
Under the federal bankruptcy laws, a debtor's estate consists, inter
alia, of "all legal or equitable interests of the debtor in property as of
the commencement of the case." 11 U.S.C. § 541(a). "The estate
under § 541(a) succeeds only to those interests that the debtor had in
property prior to commencement of the bankruptcy case." In re FCX,
Inc., 853 F.2d 1149, 1153 (4th Cir. 1988). While it is of course true
that a bankruptcy court's order of confirmation"is treated as a final
judgment with res judicata effect," In re Varat Enterprises, Inc., 81
F.3d 1310, 1315 (4th Cir. 1996), a bankruptcy court's jurisdiction
does not extend to property that is not part of a debtor's estate. See,
e.g., In re Signal Hill-Liberia Ave. Ltd. Part., 189 B.R. 648, 652
(Bankr. E.D. Va. 1995) (citing cases); In re Murchison, 54 B.R. 721,
8
727 (Bankr. N.D. Tex. 1985) (citing cases).7 Even if we were to agree
with Rutherford that an owner of property mistakenly sold as part of
a debtor's estate may, under certain circumstances, be estopped from
claiming damages for the sale of that property, see, e.g., In re Hopkins
Corp., 76 B.R. 612, 614-15 (Bankr. S.D. Ohio 1987), the fact remains
that the certificate of need that Rutherford now claims it owns was not
even in existence at the time of the 1988 bankruptcy sale, let alone
part of ISO's estate, and therefore could not have been conveyed to
Rutherford, mistakenly or otherwise.
Nonetheless, Rutherford contends that it was the intent of the par-
ties to the 1988 sales agreement "that all `right, title and interest' in
rights equivalent to rights under a certificate of need . . . be conveyed
to Rutherford Hospital." Ruth. Br. 25 (emphasis added). By way of
explanation, Rutherford argues that "the nature of the interest in the
operating rights that was intended to be conveyed[in section C of the
agreement] was different from the rights encompassed by the two
Leases," Ruth. Br. 20, and that section C "was intended to relate to
the operating authority, or the broader grant or franchise from the
State of North Carolina" for the nursing home, Ruth. Br. 7. In
response, RNH argues that "[t]here is no legal or factual support for
Rutherford Hospital's position regarding the nature of the assets it
thought it acquired from ISO" and that "[t]he evidence is overwhelm-
ing that the right to operate the nursing beds is inseparable from the
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7 The district court erred when it asserted that our decision in Varat
Enterprises, supra, stands for the proposition that "a bankruptcy court
can convey away assets that are not part of the bankruptcy estate, so long
as such conveyance satisfies the requirements of due process." J.A. 549.
Varat Enterprises involved a dispute between two creditors as to which
creditor was entitled to have its claim against the debtor satisfied out of
the proceeds of a pre-bankruptcy arbitration award owed by another
party to the debtor. See 81 F.3d at 1313-14. These proceeds clearly were
part of the debtor's bankruptcy estate. Our decision in the case upheld
the bankruptcy court's order confirming the debtor's reorganization plan
that proposed to use the proceeds to pay the entire claim of one creditor
before paying the second creditor's claim with whatever money
remained. Id. The facts of Varat Enterprises and our opinion in the case
thus had nothing to do with a situation in which a bankruptcy court con-
firms the sale of property belonging to a party other than the debtor.
9
nursing facility, and that such right belongs to RNH Partnership."
RNH Br. 15. We agree with RNH.8
Rutherford's position in this case rests upon a fundamental miscon-
ception, namely, that all health care facilities in North Carolina may
only operate with the express approval of the state. This is not correct.
Like the nursing home here, not all health care facilities in North Car-
olina are subject to the certificate of need statute's requirements.
Moreover, other than a certificate of need, there is no "operating
authority" or "broader grant or franchise" that a health care provider
must secure from the state in order to develop and offer its services
to the public. Thus, it is meaningless to speak of"rights equivalent to
rights under a certificate of need." Either a certificate of need is
required to operate a health care facility in North Carolina or one is
not required. Rutherford has cited no statutory or judicial authority to
support its contrary interpretation of North Carolina's certificate of
need statute.
In this case, a certificate of need was not required to build and
operate the Rutherford Nursing Center and, accordingly, one was
never issued by the state to RNH, ISO, or to any other party. No cer-
tificate of need, therefore, could have been conveyed to Rutherford by
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8 Rutherford further contends that RNH is barred from challenging the
validity of the bankruptcy court's order confirming the sale of RNH's
"operating rights" in the nursing home from ISO to Rutherford on the
grounds that final orders of bankruptcy courts may not be collaterally
attacked by parties with sufficient notice of the original bankruptcy pro-
ceedings. Ruth. Br. 20-25; see, e.g., Maryland v. Antonelli Creditors'
Liquidating Trust, 123 F.3d 777, 782-83 (4th Cir. 1997). It is well estab-
lished, however, that a bankruptcy court's final order may be attacked
collaterally "based on the original court's lack of jurisdiction." Spartan
Mills v. Bank of America Illinois, 112 F.3d 1251, 1255 (4th Cir. 1997).
As explained above, the bankruptcy court in this case lacked jurisdiction
to transfer any assets to Rutherford that not only were not part of ISO's
estate, but did not even exist at the time of the bankruptcy sale. Conse-
quently, RNH is free to argue in opposition to Rutherford's declaratory
judgment action that notwithstanding the bankruptcy court's confirma-
tion of the 1988 sales agreement, Rutherford "merely has leasehold inter-
ests in the nursing home and personal property that terminate at the end
of the leases." RNH Br. 19.
10
operation of section C of its 1988 sales agreement with ISO. Further-
more, section C in no way purports to convey the rights to future cer-
tificates of need that may be required to operate the facility.
Consequently, although Rutherford may claim that"it was ISO's
intention to convey whatever operating authority, regulatory approval,
franchise, permission or permit that ISO had from the state to go with
the purchase," Ruth. Br. 7, to the extent that Rutherford is referring
to a certificate of need, or anything "equivalent" thereto, no such con-
veyance took place. The only interests that Rutherford acquired in the
Rutherford Nursing Center as a result of the 1988 bankruptcy sale
were the two undisputed leases. The right to operate the nursing home
following the termination of the leases remains with its owner, RNH.
See Smith v. Simpson, 260 N.C. 601, 609, 133 S.E.2d 474, 481 (1963)
("Ownership of personal property ordinarily carries with it the right
of control and use"); Hildebrand v. Telegraph Co., 219 N.C. 402,
408, 14 S.E.2d 252, 256 (1941) (owner's rights in property include
"the right to possess, use, enjoy and dispose of it, and the correspond-
ing right to exclude others from its use").
III.
For the foregoing reasons, the judgment of the district court is
AFFIRMED.
11