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1 hcm Doc#11 Filed 07/29/15 Entered 07/29/15 16:48:29 Main Document Pg 1 of IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF TEXAS EL PASO DIVISION IN RE: EL PASO CHILDREN S HOSPITAL CORPORATION CASE NO HCM DEBTOR. CHAPTER 11 EIN: ALAMEDA AVENUE EL PASO, TEXAS EL PASO CHILDREN S HOSPITAL CORPORATION PLAINTIFF, ADV. PRO. NO V. DEFENDANT. EL PASO FIRST HEALTH PLANS, INC., PLAINTIFF S OPPOSITION TO DEFENDANT S MOTION TO DISMISS THE COMPLAINT TO THE HONORABLE U.S. BANKRUPTCY JUDGE H. CHRISTOPHER MOTT: El Paso Children s Hospital ( Debtor or Plaintiff ), hereby files its Opposition to the Motion to Dismiss the Complaint filed by El Paso First Health Plans, Inc. ( Defendant ) ( Motion to Dismiss ), and would show as follows: I. INTRODUCTION 1. The Plaintiff has filed its First Amended Complaint, to which it added additional facts and clarification as to its fraudulent transfer cause of action as well as with respect to its causes of action for unjust enrichment and quantum meruit. The Defendant s Motion to Dismiss has been rendered moot by the filing of the Plaintiff s First Amended Complaint. In addition, the Plaintiff meets applicable pleading standards for its fraudulent transfer cause of

2 hcm Doc#11 Filed 07/29/15 Entered 07/29/15 16:48:29 Main Document Pg 2 of action against the Defendant as well as for its causes of action for unjust enrichment and quantum meruit. The Motion to Dismiss should be denied. II. FACTUAL BACKGROUND 2. On May 19, 2015 ( Petition Date ), the Plaintiff filed its petition for relief under Chapter 11 of the Bankruptcy Code. The Plaintiff is a debtor-in-possession pursuant to 1107(a) and 1108 of the Bankruptcy Code. No request for the appointment of a trustee or examiner has been made in this bankruptcy case, and no committee has been appointed or designated. 3. On the Petition Date, the Plaintiff filed its Complaint against the Defendant thus initiating this adversary proceeding ( Original Complaint ). In the Original Complaint, the Plaintiff alleged causes of action pursuant to 548 and 550, as well as for unjust enrichment and quantum meruit. 4. On July 8, 2015, the Defendant filed its Motion to Dismiss [Dckt. No. 9]. In its Motion to Dismiss, the Defendant asserted that the Original Complaint s cause of action pursuant to 548(a) should be dismissed, arguing that the Plaintiff did not identify a transfer of the Plaintiff s property sufficiently to form the basis of its fraudulent transfer cause of action against the Defendant, and that its knowing participation in any fraudulent transfer was irrelevant. See Motion to Dismiss, In the Motion to Dismiss, the Defendant also asserted that the Plaintiff s causes of action for unjust enrichment and quantum meruit should be dismissed because the Original Complaint does not seek to void the Provider Agreement. See Motion to Dismiss, On July 29, 2015, the Plaintiff filed its First Amended Complaint [Dckt. No. 10] ( First Amended Complaint ). In the First Amended Complaint, the Plaintiff added additional facts to its cause of action under 548 of the Bankruptcy Code. The Plaintiff also added a 2

3 hcm Doc#11 Filed 07/29/15 Entered 07/29/15 16:48:29 Main Document Pg 3 of cause of action under 544 of the Bankruptcy Code on the same set of facts. Because the filing of the First Amended Complaint moots the Motion to Dismiss, and because the Plaintiff has adequately pled all of its causes of action, the Motion to Dismiss should be denied. III. ARGUMENT & AUTHORITIES A. Plaintiff s First Amended Complaint has Rendered the Motion to Dismiss Moot 6. Concurrently with the filing of this Opposition, the Plaintiff has filed its First Amended Complaint, adding additional facts and clarification as to its fraudulent transfer cause of action, as well as with respect to its causes of action for unjust enrichment and quantum meruit. Therefore, the Motion to Dismiss has been rendered moot by the filing of the Plaintiff s First Amended Complaint. 7. Rule 15(a) of the Federal Rules of Civil Procedure provides that a party may amend its pleading once as a matter of course at any time twenty-one (21) days after service of a responsive pleading, or twenty-one (21) days after service of a motion under Rule (b). 1 FED. R. CIV. P. 15(b). The Motion to Dismiss is not a responsive pleading, and was made pursuant to Rule (b). See FED. R. CIV. P. 7; Zaidi v Ehrlich, 732 F.2d 18, (5th Cir. 1984). 6 Charles A. Wright, Arthur R. Miller & Mary K. Kane, Fed. Prac. and Proc at (1986) (concluding that it is clear that an amendment as of course may be served after a motion directed to the pleadings has been made ). 8. When an amendment as a matter of course is filed, any pending motions directed at the prior pleading are moot. See, e.g., Enderwood v. Sinclair Broadcast Group, Inc., No , 2007 U.S. App. LEXIS 9393, at *7 (10th Cir. Apr. 23, 2007); Miller v. Yokohama Tire 1 The Defendant filed its Motion to Dismiss on July 8, 2015 [Dckt. No. 9]. The Defendant s Motion to Dismiss was timely because the time for it to move, answer, or otherwise respond to the Complaint had been extended to July 8, 2015 via the Notice of Parties Stipulation to Extend Deadline to Move, Answer, or Otherwise Respond to Complaint ( Stipulation ) [Dckt. No. 4]. 3

4 hcm Doc#11 Filed 07/29/15 Entered 07/29/15 16:48:29 Main Document Pg 4 of Corp., 358 F.3d 616, 619 (9th Cir. 2004); T.G. Slater & Son, Inc., v. The Donald P. and Patricia A. Brennan, LLC, 385 F.3d 836, 846 n.1 (4th Cir. 2004), Infomart (India), PVT, Ltd. v. Metrowerks Corp. No. 3:04-CV-99-N, 2005 U.S. DIST. LEXIS 11095, at *2 (N.D. Tex. filed Feb. 7, 2005). Thus, the filing of an amended complaint renders a pending motion to dismiss moot. See, e.g., Miller v. Wachovia Bank, N.A., 541 F. Supp. 858, 860 (N.D. Tex. 2008); In re Bigler LP, No , 2010 WL , at *7 (Bankr. S.D. Tex. May 18, 2010); In re Plusfive Holdings, L.P.,No , 2008 WL , at *1 (Bankr. N.D. Cal. March 20, 2008) (remarking that [t]he amended complaint moots the Rule (b)(6) argument. ). Accordingly, given the filing of the First Amended Complaint by the Plaintiff, the Motion to Dismiss filed by Defendant should be denied as moot. 9. Subject to the mootness of the Defendant s Motion to Dismiss, the Plaintiff responds below. B. Plaintiff s Fraudulent Transfer Claim Under 548(a) of the Bankruptcy Code Meets Applicable Pleading Standards 10. Courts agree that motions to dismiss for failure to state a claim are disfavored, and a court will only rarely encounter circumstances which justify granting such a motion. See, e.g., Texas Taco Cabana, L.P. v. Taco Cabana of New Mexico, 304 F. Supp. 2d 903, 907 (W.D. Tex. 2003) (citing Mahone v. Addicks Utility Dist., 836 F.2d 921, 926 (5th Cir. 1988)); Collins, 224 F.3d at 498. Furthermore, a court examining the legal sufficiency of a complaint must view the facts in the light most favorable to the plaintiffs. Beavers v. Metro Life Ins. Co., 566 F.3d 436 (5th Cir. 2009) (quoting Fernandez-Montes v. Allied Pilots Ass n, 987 F.2d 278 (5th Cir. 1993)). Moreover, Rule 8 pleading standards are met when a plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Lowell Feldman Liquidating Trustee of the UPH 4

5 hcm Doc#11 Filed 07/29/15 Entered 07/29/15 16:48:29 Main Document Pg 5 of Liquidating Trust v. Leap Wireless International, Inc., No , 2014 Bankr. LEXIS 3680, at *40 (Bankr. W.D. Tex. Aug. 28, 2014) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678, 9 S.Ct. 1937, 173 L. E. 2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 7 S.Ct. 1955, 167 L.Ed. 2d 929 (2007)). Furthermore, a court should assume the veracity of any well-pleaded allegations and then determine whether they plausibly give rise to an entitlement to relief. Id. 11. Notwithstanding the mootness of Defendant s Motion to Dismiss, as discussed above, no circumstances are present here that justify dismissal of the Plaintiff s First Amended Complaint, and the Defendant s Motion to Dismiss should be denied. The Plaintiff has met applicable pleading standards for its fraudulent transfer cause of action under 548 in a manner that is more than adequate to meet applicable pleading standards as delineated by Ashcroft v. Iqbal, 556 U.S. 662, 9 S.Ct (2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 7 S.Ct (2007). Moreover, the First Amended Complaint meets the standards of Iqbal and Twombly as applied by bankruptcy courts with respect to avoidance actions such as this proceeding. See, e.g., In re Think3 Litig. Trust v. Zuccarello (In re Think3, Inc.), 529 B.R. 147 (Bankr. W.D. Tex. 2015); In re Crescent Resources, LLC, 20 WL (Bankr. W.D. Tex. Jan. 23, 20).. The Court in Think3 Litig. Trust addressed pleading requirements to causes of action for both actual and constructive fraud under 548 of the Bankruptcy Code. Think3 Litig. Trust, 529 B.R. at The Defendant asserted in its Motion to Dismiss that the Plaintiff failed to sufficiently plead actual intent. As set forth in Think3 Litig. Trust, however, the Fifth Circuit has adopted the so-called badges of fraud test to determine whether a debtor had actual intent to delay, hinder, or defraud creditors. Id. (citing Soza v. Hill (In re Soza), 5

6 hcm Doc#11 Filed 07/29/15 Entered 07/29/15 16:48:29 Main Document Pg 6 of 542 F.3d 1060, 1067 (5th Cir. 2008). Such badges of fraud include the following in connection with a cause of action pursuant to 548: (1) the lack of inadequacy of consideration received by the debtor; (2) the family, friendship, or close associate relationship between the parties; (3) the retention of possession, benefit, or use of the property in question; (4) the financial condition of the debtor-both before and after the transaction in question; (5) the existence or cumulative effect of the pattern or series of transactions or course of conduct after the incurring of debt by the debtor; (6) onset of financial difficulties by the debtor; (7) pendency or threat of suits by creditors of the debtor; and (8) the general chronology of events and transactions under inquiry. Id. (citing Soza, 541 F.3d at 1067). Pleading facts that demonstrate such badges of fraud is sufficient to satisfy applicable pleadings requirements for the actual intent requirement for 548(a). See id. 13. Applying these standards to the First Amended Complaint, the Plaintiff has pled fraud with sufficient particularity to satisfy applicable pleading standards. See id. More than one badge is alleged by the Plaintiff in the First Amended Complaint. In particular, the Plaintiff alleged that the Provider Agreement 2 and attendant obligations thereto resulted in significant underpayment to Plaintiff stemming from Plaintiff s obligation thereto to provide healthcare services to enrollees of Defendant. See First Amended Complaint, 18. The Plaintiff also expressly pleaded that the Plaintiff received inadequate consideration in the form of undermarket reimbursement. See First Amended Complaint, 19-23, and In the First Amended Complaint, the Plaintiff set forth in detail the close associate relationship between the Plaintiff and the Defendant s parent corporation, UMC, as well as the rationale behind the reason for the Plaintiff entering into the Provider Agreement. See First 2 The term Provider Agreement shall mean the agreement between the Plaintiff and the Defendant executed on March 9, 20, whereby the Plaintiff agreed to provide healthcare services to enrollees of a El Paso County Hospital District d/b/a University Medical Center ( UMC ) health plan. 6

7 hcm Doc#11 Filed 07/29/15 Entered 07/29/15 16:48:29 Main Document Pg 7 of Amended Complaint, In particular, the Plaintiff pleaded that UMC, which enjoyed a revolving door, and overlapping board of directors with Plaintiff, mandated that the management of certain indigent care problems had to be through the Defendant, which thrust the Plaintiff into an economically unhealthy relationship with the Defendant. See First Amended Complaint, The Plaintiff also pleaded additional badges of fraud in the First Amended Complaint. The Plaintiff pleaded the financial condition of the Plaintiff before and after the transactions in question. In the First Amended Complaint, the Plaintiff alleged that it was thrust into the Provider Agreement at the behest of UMC at the Plaintiff s inception. See First Amended Complaint, -16. The Plaintiff also alleged that it lost money in providing services to the Defendant s enrollees because the reimbursement rates paid by the Defendant were so low. See First Amended Complaint, 21-23, Furthermore, the Plaintiff pleaded the general chronology of events and transaction under inquiry relevant to its claims. See First Amended Complaint, Finally, the Plaintiff pleaded the effect of the transactions with the Defendant, alleging that the Plaintiff lost money in providing service to enrollees of the Defendant because the rates paid to the Defendant pursuant to the Provider Agreement were so low. See First Amended Complaint, 23, Under the pleading standards applicable to a cause of action for actual fraud under 548(a), the Plaintiff has pled fraud with sufficient particularity in the First Amended Complaint. See Think3 Litig. Trust, 529 B.R. at The First Amended Complaint also meets applicable pleading requirements with respect to its allegations concerning whether there was a transfer to which 548(a) applies. Although the Defendant asserts in its Motion to Dismiss that the Plaintiff fails to sufficiently 7

8 hcm Doc#11 Filed 07/29/15 Entered 07/29/15 16:48:29 Main Document Pg 8 of plead that there was a transfer of the Debtor s property, the Plaintiff s allegations in the First Amended Complaint readily satisfy applicable pleading standards for its cause of action under 548(a). As set forth in Crescent Res. Litig. Trust v. Nexen Pruet, LLC, (In re Crescent Resources LLC), No , 20 Bankr. LEXIS 287 (Bankr. W.D. Tex. Jan. 23, 20), to meet the pleading requirements of Twombly and Iqbal, a complaint for relief under 548(a) must do more than simply mirror the elements of 548(a). The Plaintiff s First Amended Complaint contains sufficient factual allegations as to the elements of 548(a) consistent with such standard. 17. As an initial matter, 548(a) permits a debtor to avoid any obligation incurred by the debtor that was made or incurred on or within 2 years before the date of the filing of the petition, if certain conditions are met. Because section 548 recognizes both transfers of property and the incurrence of obligations as potentially deleterious to the Debtor and its estate, most of the Motion to Dismiss is rendered nonsensical. Section 548(a) expressly includes obligations of a debtor. As stated above, in the First Amended Complaint, the Plaintiff provides detailed factual allegations with respect to the relationship that gave rise to the Provider Agreement, the obligations incurred by the Debtor with respect to the Provider Agreement, and the effect the incurrence of such obligations under the Provider Agreement had on the Debtor to the ultimate benefit of UMC. 18. In the First Amended Complaint, the Plaintiff alleges that from 20 through the Petition Date, the Plaintiff made or incurred the EPF Transfers, which constitute obligations to provide services to the Defendant s enrollees at below-market rates. See First Amended Complaint, 26. The First Amended Complaint thus makes clear the Debtor seeks to avoid the obligations it incurred in relationship to the Provider Agreement as well as to recover the value 8

9 hcm Doc#11 Filed 07/29/15 Entered 07/29/15 16:48:29 Main Document Pg 9 of it was deprived as if it had not entered into the Provider Agreement, which constitutes the difference between the market rate for the health care services provided by Plaintiff and the undermarket rate paid by the Defendant to the Plaintiff. The Motion to Dismiss fails to acknowledge the avoidability of both transfers and obligations and should be denied. C. Plaintiff s Claims for Unjust Enrichment and Quantum Meruit Meet Applicable Pleading Standards 19. The Plaintiff has met applicable pleading standards for its claims for unjust enrichment and quantum meruit in the First Amended Complaint. In the Motion to Dismiss, the Defendant asserts that the Plaintiff s causes of action for unjust enrichment and quantum meruit should be dismissed because the Plaintiff did not seek to void the Provider Agreement. In the First Amended Complaint, the Plaintiff in fact requests avoidance of the Provider Agreement. See First Amended Complaint, 34 & Further, contrary to the Defendant s assertions in the Motion to Dismiss, Texas courts have held that overpayments under a valid contract may give rise to a claim or restitution or unjust enrichment. Southwestern Elec. Power Co. v. Burlington N. R.R.,966 S.W.2d 467, (Tex. 1998) (citing Gulf Oil Corp. v. Lone Star Producing Co.,322 F.2d 28, (5th Cir. 1963) (allowing plaintiff to recover money paid in excess of contract price); Natural Gas Pipeline Co. v. Harrington, 246 F.2d 915, 921 (5th Cir. 1957) (allowing a restitution claim for the difference between contract rate and price paid under invalid rate set by regulatory board. By extension, the Defendant has been overcompensated through the Plaintiff s provision of services to its enrollees at the undermarket rates provided in the Provider Agreement, as alleged in the First Amended Complaint. Although the Plaintiff has requested that the Provider Agreement be voided such that no express agreement would exist to preclude claims for unjust enrichment and quantum meruit, the Plaintiff should have a right to recovery for the difference 9

10 hcm Doc#11 Filed 07/29/15 Entered 07/29/15 16:48:29 Main Document Pg 10 of between the value of the services it provided, which essentially constitute an overpayment or overcompensation to the Defendant, and the undermarket reimbursement rate it received. 21. Because Plaintiff demands that the Provider Agreement be voided as representative of an avoidable obligation under 548, Plaintiff s claims for unjust enrichment and quantum meruit cannot be dismissed. Accordingly, the Motion to Dismiss is logically unsound and must be denied as to the Plaintiff s claims for unjust enrichment and quantum meruit. IV. CONCLUSION 22. Defendant s Motion to Dismiss rests on a patently illogical foundation and should be denied. The filing of Plaintiff s First Amended Complaint has rendered the Motion to Dismiss moot pursuant to Rule 15(a). The Plaintiff s allegations with respect to its cause of action under 548(a) of the Bankruptcy Code more than meet applicable pleading requirements under both Twombly and Iqbal to state a claim for relief. In addition, the Plaintiff s allegations with respect to its claims for unjust enrichment and quantum meruit also meet applicable pleading requirements. Accordingly, the Plaintiff requests that the Court deny the Motion to Dismiss, and enter judgment against Defendant, as set forth in Plaintiff s First Amended Complaint, and award to Plaintiff its costs and attorneys fees. WHEREFORE, PREMISES CONSIDERED, the Plaintiff El Paso Children s Hospital Corporation requests that Defendant s Motion to Dismiss be denied; and that the Plaintiff be granted any and all other relief to which it may show itself to be justly entitled. Dated: July 29,

11 hcm Doc#11 Filed 07/29/15 Entered 07/29/15 16:48:29 Main Document Pg 11 of Respectfully submitted, JACKSON WALKER L.L.P. 100 Congress Avenue, Suite 1100 Austin, Texas By: /s/ Patricia B. Tomasco Patricia B.Tomasco State Bar No (5) Direct Phone (5) Direct Fax address: Marvin E. Sprouse III State Bar No (5) Direct Phone (5) Direct Fax address: Jennifer F. Wertz State Bar No (5) Direct Phone (5) Direct Fax address: COUNSEL FOR THE PLAINTIFF 11

12 hcm Doc#11 Filed 07/29/15 Entered 07/29/15 16:48:29 Main Document Pg of CERTIFICATE OF SERVICE I hereby certify that on the 29th day of July 2015, a true and correct copy of the foregoing has been served via the Court s CM/ECF electronic notification system on the parties listed below and any other party requesting same: Louis Strubeck, Jr. Liz Boydston NORTON ROSE FULBRIGHT US, LLP 2200 Ross Avenue, Suite 3600 Dallas, Texas /s/ Patricia B. Tomasco Patricia B. Tomasco v /00009

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15-3074-hcm Doc#150 Filed 07/10/15 Entered 07/10/15 19:14:59 Main Document Pg 1 of IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF TEXAS EL PASO DIVISION IN RE: EL PASO CHILDREN S HOSPITAL