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In re Specialty Hospital of Washington, LLC

United States District Court, District of Columbia

November 28, 2017

DCA CAPITOL HILL LTAC, LLC, et al., Defendants. CAPITOL HILL GROUP, Plaintiff,



         The plaintiff, Capitol Hill Group, the landlord of a hospital building located at 700 Constitution Avenue, NE, Washington, D.C., commenced this suit in Superior Court for the District of Columbia against the tenants of this building, the defendants, DCA Capitol Hill LTAC, LLC and DCA Capitol Hill SNF, LLC, alleging breach of the rental contract due to the defendants' withholding of more than $1, 000, 000 in rent. Compl., ECF No. 1-1, Adv. Proc. 15-10027 (Bankr. D.C.). The defendants removed the suit to the United States Bankruptcy Court for the District of Columbia, pursuant to 28 U.S.C. § 1452(a), on grounds that federal bankruptcy jurisdiction exists, under 28 U.S.C. § 1334(b), because this case “arises in and/or is related to” a separate bankruptcy proceeding involving the prior lessee of the building. Defs.' Notice of Removal (“Defs.' Removal Notice”) ¶ 1, ECF No. 1, Adv. Proc. 15-10027 (Bankr. D.C.).[1] The plaintiff promptly filed a motion to withdraw the reference from the Bankruptcy Court, ECF No. 1, which motion was referred to the Bankruptcy Court for a report and recommendation, Mem. & Order, ECF No. 5. Pending before the Court are the Bankruptcy Court's Report and Recommendation (“R&R”), ECF No. 6, recommending grant of the plaintiff's motion for withdrawal of the reference to Bankruptcy Court for lack of federal bankruptcy jurisdiction, the defendants' objections thereto, Defs.' Obj. Bankr. Ct.'s R&R (“Defs.' Obj.”), ECF No. 7, and the plaintiff's motion for remand of the case to Superior Court, Pl.'s Mot. Remand, ECF No. 8. For the reasons explained more fully below, this Court lacks subject matter jurisdiction over this case and, consequently, the plaintiff's motions to withdraw the reference and to remand are granted.[2]

         I. BACKGROUND

         The factual background of this case is extensively reviewed by the Bankruptcy Court, see R&R at 4-16, and, consequently, will only be briefly summarized, followed by review of the relevant procedural history.


         Specialty Hospital, the previous lessee of the hospital building at issue in this case, declared bankruptcy and, in the course of its bankruptcy proceedings, assigned the lease in 2014 to the defendants. R&R at 5. As part of this confluence of events, two separate agreements among different parties were executed and an order of the Bankruptcy Court was issued that now form the basis of the defendants' assertion of federal bankruptcy jurisdiction.

         The first agreement, titled “Specialty Hospital of America, LLC Landlord Sale Support Agreement Term Sheet, ” was entered on May 28, 2014, by the plaintiff and the defendants' parent company, which is not a party to this action. R&R at 5; Pl.'s Resp. Defs.' Obj. (“Pl.'s Resp.”), Ex. A (“Sale Support Agreement” or “SSA”), ECF No. 9-2. This Sale Support Agreement established the framework for finalizing the terms of the new lease to replace the extant lease between the plaintiff and the debtor, Specialty Hospital. R&R at 5-7. By its terms, this agreement was not “exhaustive as to the final terms, ” such that if any SSA terms conflicted with a subsequent agreement between the parties, “the latter shall govern.” SSA at 1; see also id. ¶ 16 (noting that “New Lease and the SSA will be subject to the negotiation, execution and delivery of definitive forms of agreement . . . embodying the terms set forth herein reasonably satisfactory to Buyer and Landlord.”). Significantly for the defendants' justification for the withholding of rent, the SSA provided, as a condition for the defendants' parent company entering the new lease, that the plaintiff would “fully fund the costs and expenditures required to complete the new HVAC [Heating, Ventilation, and Air Conditioning] system and boiler room” and construction on a “multi-rec room project and entry ramp project.” Id. ¶ 18. In the defendants' view, the plaintiff “failed to comply with these conditions and fraudulently represented that it complied with these conditions.” R&R at 7.

         The second agreement, titled “Asset Purchase Agreement, ” was executed on June 20, 2014, by Specialty Hospital and the defendants' parent company providing for the sale of substantially all of the debtor's assets to the latter. R&R at 8 n.3; Pl.'s Resp., Ex. C (“Asset Purchase Agreement”), ECF No. 9-4. Although the plaintiff was not a party, this agreement nonetheless referenced obligations of the plaintiff stating that the plaintiff “shall be in full compliance with the terms of the Sale Support Agreement, ” Asset Purchase Agreement § 8.1(1), and that the new lease would be “effective as of the Closing” of the sale, id. § 8.1(m).

         The Bankruptcy Court approved the Asset Purchase Agreement in a Sale Order, entered on June 30, 2014, thereby authorizing the debtor to sell its assets to the defendants' parent company. R&R at 9-10; Pl.'s Resp., Ex. D (“Sale Order”), ECF No. 9-5. The Sale Order provides that “upon certain payments being made to [the plaintiff] by the closing of the sale, the new lease was to be deemed assumed by Specialty Hospital and assigned to [the defendants' parent company] . . . with all preexisting obligations under the lease as of the closing date to be treated as cured.” R&R at 10-11; Sale Order ¶ 32. The Sale Order further expressly states that the Bankruptcy Court retains “exclusive jurisdiction” to enforce and resolve disputes related to the Asset Purchase Agreement. Sale Order ¶ 53.

         About six months after entry of the Sale Order approving the sale of the debtor's assets, the plaintiff and defendants executed, on December 16, 2014, the new lease, titled “Amended and Restated Lease Agreement.” Pl.'s Resp., Ex. B (“2014 Lease”), ECF No. 9-3. Particularly relevant here, the 2014 Lease contains an express integration clause providing that the lease “contains and embodies the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements, negotiations, and discussions between the parties hereto.” Id. § 24.10. Further emphasizing the controlling force of the 2014 Lease, this provision makes clear that “[a]ny representation, inducement or agreement that is not contained in this Lease shall not be of any force or effect.” Id. Other provisions in the 2014 Lease referenced the plaintiff's obligations to complete construction of the new ramp and auditorium, and acknowledged installation of a new HVAC system, with detailed procedures and timing for resolution of any matters “in connection with such installation.” Id. § 8.4.

         Two days after execution of the 2014 Lease, Specialty Hospital and the defendants' parent company closed on the sale of debtor's assets and the 2014 Lease “was contemporaneously assumed and assigned and went into effect.” R&R at 14. As the Bankruptcy Court notes, if the defendants' parent company was not satisfied with the plaintiff's compliance with the terms of the Sale Support Agreement, the defendants' parent company was entitled not to complete the purchase under the Asset Purchase Agreement, § 8.1(1), but, instead, that company “proceeded to make the purchase, and apparently looked to § 8.4 of the [2014 Lease] as satisfactorily protecting the defendants with respect to issues regarding the HVAC system and the construction of a new auditorium and a new entry ramp.” R&R at 15; id. at 9 (noting that defendants' parent company “could have backed out of completing the purchase if [plaintiff] failed to meet its obligations under the Sale Support Agreement”) (emphasis in original).

         According to the defendants, after the closing they discovered that, contrary to the requirements of the Sale Support Agreement and representations in the 2014 Lease, the plaintiff had not installed a new and fully-functioning HVAC system. R&R at 14-15. In September 2015, more than one year after the Bankruptcy Court's issuance of the Sale Order and nine months after the 2014 Lease went into effect, the defendants began withholding rent because of the plaintiff's alleged failure to install a fully-functioning HVAC system. Pl.'s Mem. Supp. Mot. Remand (“Pl.'s Mem.”) at 4, ECF No. 8-1. To date, according to the plaintiff, the defendants have withheld more than $1, 200, 000 in rent. Id.


         On October 23, 2015, the plaintiff filed suit in Superior Court alleging that the defendants had breached the 2014 Lease by failing to pay rent due and seeking rent accrued as well as penalties, interest, costs, expenses, and attorneys' fees. Compl. ¶¶ 129-39; Pl.'s Mem. at 4. The plaintiff also seeks a declaratory judgment clarifying that, under the 2014 Lease, the landlord's responsibility is limited to “construction of a ramp, awning and auditorium as defined in the Lease” and no additional HVAC upgrades and installation are required. Compl. ¶¶ 140-51, Relief Requested.

         The defendants timely removed the case directly to United States Bankruptcy Court for the District of Columbia alleging bankruptcy jurisdiction, under 28 U.S.C. § 1334(b), due to this landlord-tenant matter arising in and being related to the original bankruptcy proceeding involving Specialty Hospital. Defs.' Removal Notice at 1-2; Defs.' Resp. Pl.'s Mot. Remand (“Defs.' Resp.”) at 4, ECF No. 11; Pl.'s Resp. at 8. The defendants' Answer asserted four affirmative defenses based on the 2014 Lease, Defs.' Answer and Counter Claims (“Defs.' Ans.”) ¶¶ 153-54, 162-63, ECF No. 18, Adv. Proc. 15-10027 (Bankr. D.C.), and four counterclaims for alleged violations of the Sale Order, fraudulent misrepresentation, and breach of contract by the plaintiff, id. ¶¶ 209-36.

         The plaintiff responded to the defendants' removal of this action to Bankruptcy Court by moving to withdraw the reference to the Bankruptcy Court, Pl.'s Mot. Withdraw Reference, ECF No. 1, which motion was referred to the Bankruptcy Court for a report and ...

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