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Paloian v. LaSalle Bank
United States Court of Appeals for the Seventh Circuit
619 F.3d 688 (2010)
Doctors Hospital of Hyde Park (the hospital) (debtor) was owned by James Desnick. The hospital had cash-flow problems and needed to borrow money. Daiwa Healthco (Daiwa) gave a $25,000,000 line of credit to MMA Funding, L.L.C. (MMA). MMA was owed by Desnick and made the line of credit available to the hospital for operating expenses. In exchange, the hospital purported to transfer all of its accounts receivable to MMA. Desnick and Daiwa intended that MMA would operate as a bankruptcy-remote vehicle in order to protect Daiwa if the hospital entered bankruptcy. In practice, MMA did not operate as a separate entity but instead like a department of the hospital. MMA did not maintain an office, did not prepare financial statements or tax returns, did not actually purchase the hospital’s accounts receivables, and the hospital’s accounting continued to be carried on the hospital’s books. After engaging in other complex financing transactions, the hospital entered bankruptcy. During the bankruptcy proceeding, the trustee sought to recover money that flowed through MMA to the hospital. On appeal, the parties disagreed whether MMA was a valid bankruptcy-remote vehicle and thus protected from the trustee’s action.
Rule of Law
Holding and Reasoning (Easterbrook, C.J.)
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