Senior Living Properties, LLC Creditor Claimed Insurer Was Bankrupt Debtor’s De Facto Partner

On Aug. 8, 2003, plaintiff Dan B. Lain became trustee of the assets of bankruptcy debtor Senior Living Properties LLC (SLP), a nursing home company. Lain’s duties included liquidating the assets and using the proceeds to satisfy claims against SLP, including claims by unsecured creditors and personal injury claimants.
Lain sued a surety of SLP’s, ZC Specialty Insurance Co., a subsidiary of Zurich Financial Services Group, alleging that ZC was SLP’s partner in the nursing home business and therefore liable for SLP’s debts.
Lain alleged that, in February 1998, ZC engineered the purchase of about 88 nursing homes in Texas and Illinois for $246 million. ZC arranged a GMAC loan of $226 million with subordinated loans of $20 million.
Lain further alleged that, for its role in the transaction, ZC contracted to receive the first $4 million of the annual profit of the nursing homes, plus at least 70% of the fair market value of the homes if later sold; and to have sole discretion over hiring and firing a nursing-home management company. Lain claimed that the 70% terms later increased to 90%.
ZC also required liability insurance to be maintained on the nursing homes, with ZC as a named insured; required that GMAC be paid each month before any other payments were made; and had the right to examine the nursing homes’ books and records at any time.
Lain alleged that, at the closing of the transaction in February 1998m ZC for the first time identified SLP, a company with no assets or capital, as the “buyer” and henceforth the “nominee owner” of the nursing homes. ZC contended that SLP was a bankruptcy-remote entity required by GMAC for REMIC (real estate mortgage investment conduit) participation and that SLP had been identified as such an entity as early as 1997.

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