Rutherford Hospital, Incorporated v. Rnh PartnershipRutherford Hospital, Incorporated v. Rnh Partnership
Affirmed by published opinion. Judge BLAKE wrote the opinion, in which Judge MURNAGHAN and Judge WILLIAMS joined.
OPINION
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 facility’s property, structures, and equipment. The district court denied Rutherford’s claim, finding that “upon expiration of the leases, [Rutherford] 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 personal 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 medical facility.” Ruth. Br. 11.
ISO operated the nursing home until 1988, when it filed a voluntary petition for bankruptcy in the United States Bankruptcy Court for the Middle District of North Carolina. As part of the bankruptcy proceedings, 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
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.
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 Center.
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 ease centers around the meaning and significance of section C, which apparently was intended to transfer from ISO to Rutherford the state-mandated “certificate 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 confirming 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 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
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 facility. In March 1992, in response to Rutherford’s inquiry, the North Carolina Department of Human Resources, Certificate of Need Section (“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 Department subsequently reached a settlement. 3
Rutherford filed the present suit in the United States District Court for the Western District of North Carolina in December 1996. Rutherford is seeking a declaratory judgment that RNH “is forever barred from asserting that [Rutherford] does not own all right, title and interest 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 interests 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 Rutherford 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 concluded that RNH had not received proper notice “reasonably calculated 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.
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),
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 institutional 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 services 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) (defining “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 Wilkesboro, Ltd.,
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 Nursing 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 Rutherford, Rutherford could not have acquired, and does not now possess, such a license for the facility.
Nonetheless, Rutherford contends that it was the intent of the parties 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 overwhelming that the right to operate the nursing beds is inseparable from the 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 misconception, namely, that all health care facilities in North
In this ease, 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 certificate of need, therefore, could have been conveyed to Rutherford by operation of section C of its 1988 sales agreement with ISO. Furthermore, section C in no way purports to convey the rights to future certificates 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 conveyance 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,
III.
For the foregoing reasons, the judgment of the district court is
AFFIRMED.
Notes
. 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.
. The Department mistakenly believed that a certificate of need had been issued for the facility.
. In the Settlement Agreement, dated December 6, 1996, the Department ”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 appropriate 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 “grandfathered" with respect to such rights under the Certificate of Need Law.
J.A. 296.
. Magistrate Judge Max 0. Cogburn exercised jurisdiction in the case pursuant to 28 U.S.C. § 636(c).
. 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 compensation.” J.A. 549. Since, as explained in part II of our opinion, we
. We think that Rutherford’s characterization of the certificate of need statute as establishing “a system of state[ ]-mandated franchises for operation 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 permit than to a franchise agreement.
. 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
. 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 proceedings. Ruth. Br. 20-25;
see, e.g., Maryland v. Antonelli Creditors' Liquidating Trust,