GS014407
MICHELLE ROUILLARD v AMERICAN HEALTHGUARD CORP
Motion for Order Authorizing the Establishment of Liquidated Trust

This proceeding was commenced on August 13, 2012 when the Applicant, Brent Barnhart, as Director of the Department of Managed Health Care, filed a Complaint regarding Respondent, American Healthguard Corp. The Respondent is located in Arcadia and assists its enrollees with receiving dental care.

The Department of Managed Health Care is charged with administering and enforcing the Knox-Keene Health Care Service Plan Act of 1975, which is the body of law regulating health care service plans in California. The Act is enacted at Health & Safety Code sections 1340 to 1399.835.
The Department of Managed Health Care is authorized to ensure that regulated health plans are financially stable. The Department of Managed Health exercised this authority on August 10, 2012 and appointed a conservator, Frank Stevens, under Health and Safety Code section 1393 for the Respondent, American Healthguard Corp., because it was not financially solvent. The Court approved this appointment on September 4, 2012. 
Mr. Stevens investigated the financial condition of the Respondent and found that it is insolvent because it was unable to pay its debts as they came due in the ordinary course of business. Mr. Stevens recommended to the Applicant that the Respondent’s enrollees be transferred and he has begun to wind up the affairs of the Respondent. Liberty Dental has agreed to accept an assignment of the Respondent’s enrollees into its plan and to ensure that the enrollees continue to receive medical care. 
Mr. Stevens stopped all payments to health care providers, consultants, and trade vendors that arose prior to his appointment on August 10, 2012. Mr. Stevens then created a creditor claims process and sent notices to all known creditors on September 19, 2012. 
On August 14, 2013, the Court approved the creditor claims process. On February 6, 2014, the Court resolved all disputed proof of claims and affirmed Mr. Stevens’ decision to reject two creditor claims. On April 3, 2014, the Court approved the administrative expenses, affirmed tax payments, and approved an interim distribution of funds to creditors. 

This hearing concerns a request for authorization to establish a trust to liquidate the Respondent’s assets for creditors. The hearing was continued from August 8, 2014. 

The Conservator proposes that the Court authorize the creation of the trust to hold the Respondent’s assets for the purpose of recovering payments and distribution to approved creditors, subject to Court approval. The Court would retain jurisdiction over the trust to allow the trustee to petition the Court for approval of trustee actions. 
The Conservator, Frank Stevens, has provided a declaration to offer facts supporting the request for the liquidating trust. The Court notes that page 2 of his declaration, which includes paragraphs 2 to 8, is missing from the declaration filed with the Court. This page appears to include facts regarding the Conservator’s history of administering the Respondent.
The proposed trust would include the two remaining assets of the Respondent. First, the Respondent has the company itself and the license as a specially licensed HMO in California (Stevens decl. paragraph 12). Second, the Respondent has a promissory note that was signed by the Respondent’s principal, David Kutner, and secured by a commercial building owned by David Kutner (Stevens decl., paragraph 13). The promissory note has a value of $560,000 (Stevens decl., paragraph 13). Mr. Stevens states that the collection of approximately 50% of the promissory note, or $280,000, would be sufficient to pay in full the approved creditors (paragraph 14).

The Conservator’s memorandum fails to offer any reason to administer these assets through a trust, as opposed to continuing to administer them through the conservatorship. The moving papers include the assertion that the trust would “maximize the potential assets of the estate” (see page 4, lines 14 to 17). However, the papers do not offer any explanation that supports this assertion, i.e., how creating a trust would increase the value of the Respondent’s assets. The Application has already has appointed a conservator to wind up the affairs of the Respondent. It appears unnecessary to create a trust based on the following discussion that outlines the manner by which the conservator could liquidate the remaining assets.

The Conservator has identified a promissory note secured by a deed of trust on real property that is also an asset. A copy of the promissory note is attached as untabbed exhibit C. A review of the note reveals that it does not include a repayment schedule; instead, it is payable on demand. The note is for $125,000 plus simple interest of 12% per year from September 24, 1985. As noted above, the total amount owed by Dr. Kutner under the promissory note is $560,000.

Mr. Stevens states in paragraph 13 that a demand letter dated August 17, 2012 was delivered to Dr. Kutner, but that no payments have been received. Since Dr. Kutner refuses to pay the amounts due on the promissory note, Mr. Stevens may use the statutory procedure to collect the promissory note through foreclosure proceedings. It is not clear why the Court should delay these proceedings by creating a trust and appointing a trustee to perform the tasks required to wind up the affairs of the Respondent. 
In addition, the trust would create a burden on the assets because the trustee would be paid and the trustee must perform tasks to satisfy the trustee’s duties. The Applicant has offered no grounds to find that the benefits of trust would outweigh its burdens.
Therefore, the Court declines to approve the establishment of a trust because the conservator, Mr. Stevens, can wind up the affairs of the Respondent and distribute any amounts to creditors under the system of priority.