Hon. Elizabeth W. Magner, U.S. Bankruptcy Judge.
The Motion for Partial Summary Judgment
In August 2008, HealthEdge Investment Fund, L.P., Concentric Equity Partners II, L.P. and He-Iom Affiliates, LLC (collectively, "HealthEdge") entered into a Purchase Agreement with Paul Gremillion, Sr., Derek Lancaster and Glen Gremillion (collectively "Founders") for HealthEdge's purchase of fifty-one percent (51%) of Founders' ownership interests in Intra-Operative Monitoring Services, LLC ("IOM"). The purchase price was $26,250,000.00.
In September 2008, Gemino, on one side, and IOM and certain of its affiliated entities, on the other (collectively "Borrower"), entered into a Credit Agreement. Under its terms, Gemino agreed to loan certain sums to Borrower ("Obligations") payable on or before August 31, 2013 ("Maturity Date"). HealthEdge guaranteed repayment of the Obligations through a Collateral Assignment pledging HealthEdge's rights under the Purchase Agreement in favor of Gemino.
Prior to the Maturity Date, a dispute arose between HealthEdge and Founders with each alleging breach of the Purchase Agreement by the other. Upon learning
The claims by Founders against HealthEdge and HealthEdge's counter-claims against Founders arising from the Purchase Agreement went to arbitration. On March 26, 2015, HealthEdge prevailed and obtained an award against Founders in the amount of $8,098,176.78 ("Judgment").
While arbitration was proceeding, the Maturity Date expired but Gemino was not repaid. Gemino asserts that it has the right to collect the Judgment from Founders. In connection with its collection efforts, Gemino has engaged in settlement negotiations with Founders and allegedly Founders have agreed to pay $5,800,000.00 in full satisfaction of the Judgment. On November 24, 2015, Paul Gremillion ("Debtor") filed a Voluntary Petition for Relief under Title 11, Chapter 11 of the United States Bankruptcy Code.
HealthEdge objects to any negotiated settlement by Gemino. It asserts that while Gemino is entitled to receipt of the proceeds derived from the Judgment, it lacks the right to negotiate or force HealthEdge to accept a settlement for the amounts due.
The issue presented by this Motion involves a determination of which party, Gemino or HealthEdge, has the authority to file and pursue claims against the Debtor as well as negotiate and vote on any plan of reorganization submitted by Debtor.
Because the Judgment represents the majority of debt owed by Debtor, the party who controls both the claim and its disposition will have a major impact on the administration and reorganization of Debtor's estate. For this reason, the Court has exercised related to jurisdiction over this dispute. The Court adopts and incorporates its Reasons for Decision previously entered on this subject.
Under the terms of the Collateral Assignment, Pennsylvania law controls. The Collateral Assignment provides, in pertinent part:
Under Pennsylvania law, when a written agreement "is clear and unequivocal, its meaning is determined by its contents alone."
Initially however, Gemino did not exercise its rights in full. Upon learning of HealthEdge's claims under the Purchase Agreement, Gemino notified both HealthEdge and Founders that all payments due to HealthEdge in connection with the Purchase Agreement were to be paid to Gemino until the Obligations owed to Gemino were satisfied. With that notification in place, Gemino allowed HealthEdge to pursue its claims which resulted in the Judgment.
The Judgment confirms HealthEdge's rights and quantifies its damages for breach of the Purchase Agreement. The question presented is whether the transformation of HealthEdge's rights under
HealthEdge's argument stems from two provisions of the Assignment. First, HealthEdge argues that Gemino waived its right to pursue collection because it did not initially exercise that right when HealthEdge brought claims against Founders.
13 Pa.C.S.A. § 9102 defines "Account" as: "(1) . . . [a] right to payment of a monetary obligation, whether or not earned by performance: (i) for property which has been or is to be sold, . . . ." The Purchase Agreement memorialized the sale of IOM stock between HealthEdge and Founders. Therefore, contract rights under the Purchase Agreement are an "Account" under the U.C.C.
HealthEdge argues that under the Collateral Assignment, Gemino was only entitled to enforce `disputed claims' arising out of the Purchase Agreement. Having liquidated the `disputes' arising from the Purchase Agreement to judgment, HealthEdge now argues that Gemino has lost its ability to enforce those rights. However, 13 Pa.C.S.A. § 9607(a) provides, in pertinent part, that a secured party:
Pennsylvania law clearly grants Gemino the right to pursue or enforce HealthEdge's rights in an Account held as collateral. Therefore, Gemino's right to enforce the terms of the Purchase Agreement are not dependent on any grant of authority under the Collateral Assignment. As such, they are not limited by the Collateral Assignment's reference to `disputed claims.'
A security interest in collateral survives the exchange, disposition, substitution or modification of the collateral.
In response, Gemino argues that its initial reluctance to enter into the litigation between HealthEdge and Gemino did not waive its right to control the enforcement of the dispute at a later date. It also asserts that the Judgment is merely a confirmation of the claims flowing from the Purchase Agreement and therefore is not a proceed.
HealthEdge cites 13 Pa Stat. And Cons Stat. Ann. § 9102(a) for the proposition that the Judgment is a proceed. That statute states, "[W]hatever is acquired upon the sale, lease, license or exchange or other disposition of collateral" is a proceed. In support of this assertion, HealthEdge also refers the Court to In re Bell Fuel Corp.
In Bell, a creditor held a security interest in all the borrower's property, including intangibles. During the existence of the credit arrangement, the borrower incurred damages as a result of the interruption of its business. When its claims against its insurance policy were rejected, it sued and the carrier was ordered to pay damages. After judgment was obtained, its secured lender asserted a right to the payments ordered against the carrier.
The Court first found that the secured lender held a perfected security interest in the cause of action against the insurer. As such, any payments on that claim were proceeds of its collateral. The Court did not hold that the judgment itself was a proceed, merely the payments made on the judgment. This is not a surprising result, although it is not analogous to this circumstance at least as to the arguments being advanced. No other cases were cited in support of either party's position and this Court could not find any on point.
When a judgment is rendered on a contract, it confirms the right of a party in the contract. As such, the judgment, by merger, is the manifestation of the contract and the rights of the prevailing party. As argued by Gemino:
The Court agrees with this reasoning. A judgment does not change the contract, nor does it eliminate or expand the prevailing party's rights under the contract. A judgment is not a sale or disposition of collateral. At most it interprets its terms and quantifies the obligations owed leaving to the parties the same rights now reduced to judgment. Further, the rendering of any judgment does not automatically result in the satisfaction of the obligations owed to the judgment creditor.
For these reasons, the Judgment is not a proceed but the embodiment of the contract itself and the obligations owed to HealthEdge. While the Judgment provides authority for the enforcement of the obligations due under the Purchase Agreement, it is not the satisfaction of those obligations. Unlike a proceed, it is not derivative of the contract it confirms, as it is not payment or property obtained from the contract. Instead, it is the recognition of the right to enforce the debt.
Because a judgment does not create new rights but merely quantifies the rights that already exist, it cannot be considered a proceed of the contract. As a judgment, it confirms the rights held by HealthEdge. By the Collateral Assignment, Gemino retains the right to enforce those interests.
For the foregoing reasons and by virtue of its Collateral Assignment, Gemino has the power and authority to enforce the Judgment. As such, it has authority to file a claim on behalf of HealthEdge; negotiate treatment of the claim whether by payment, settlement or treatment under a plan of reorganization; and oppose or support by vote or objection any proposed plan of reorganization. A Judgment in accord with this Opinion will be separately rendered.