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October 20, 1980

E. H. I. OF FLORIDA, INC. d/b/a Horizon Hospital
INSURANCE COMPANY OF NORTH AMERICA, Hospital Affiliates International a wholly-owned subsidiary of Insurance Company of North America, H. A. I. of Florida, Inc., a wholly-owned subsidiary of Hospital Affiliates International, Richard Shapack, Esquire, individually and as Trustee for Serial Gross Revenue Sinking Fund Bonds, Series I and II of Horizon Hospital, Inc., John Foltz, Esquire, individually and as Trustee for Serial Gross Revenue Sinking Fund Bonds, Series I and II of Horizon Hospital, Inc., C. Edward Dobbs, Esquire, and the firm of Kutak, Rock & Huie

The opinion of the court was delivered by: LUONGO


This case is before me on plaintiff's motion for a preliminary injunction. Plaintiff, E.H.I. of Florida, Inc. (E.H.I.) alleges that the defendants committed violations of § 14(a) of the Exchange Act of 1934, 15 U.S.C.A. § 78n(a) (West 1971), §§ 14(d) and 14(e) of the Williams Amendments to the Exchange Act, 15 U.S.C.A. §§ 78n(d) and (e) (West 1971) (Williams Act), and alleges as well various pendent state claims. The alleged securities violations stem from a letter sent by defendants, Shapack and Foltz, seeking bondholder approval for an agreement entered into by them with defendant H.A.I. of Florida, Inc. for the sale of the real and personal assets of Horizon Hospital, Inc. which were subject to a mortgage and lien held by the bondholders.

 On September 29, 1980, Judge Ditter, as Emergency Judge, entered an ex parte temporary restraining order enjoining defendants "from taking any further action on the tender offer to the bondholders and any action contemplated by the solicitation materials or recommended therein, including any consideration of the responses received from the bondholders based on the solicitation materials." (Document No. 3, at 2). The temporary restraining order was scheduled to expire on October 9, 1980 (see F.R.Civ.P. 65(b)), however, after a hearing on the motion for preliminary injunction, I granted plaintiff's motion to extend it until 10:00 a.m. October 20, 1980, by which time I expected that I would rule on the motion for preliminary injunction.

 Upon pleadings and proof adduced at the hearing on the motion for preliminary injunction, I make the following Findings of Fact and Conclusion of Law. F.R.Civ.P. 52.


 1. Plaintiff, E.H.I. of Florida, Inc., is a Florida corporation and is currently operating Horizon Hospital, a psychiatric hospital located in Clearwater, Florida.

 2. Defendants are Insurance Company of North America (I.N.A.), Hospital Affiliates International, Inc., a subsidiary of I.N.A, H.A.I. of Florida, Inc. (H.A.I.), a Florida corporation which is a subsidiary of Hospital Affiliates International, Inc., Richard Shapack, Esquire, and John Foltz, Esquire, who was trustees for bondholders of bonds issued by Horizon Hospital, Inc. Also named as defendants are the law firm of Kutak, Rock and Huie and one of its partners, C. Edward Dobbs, who represents the bondholder trustees. (Dobbs, at 2.137).

 Horizon Hospital, Inc."s Articles of Incorporation provide, inter alia, that its purposes shall be "exclusively ... scientific, educational and charitable" and "not for pecuniary profit" (Articles of Incorporation, Defendants' Exhibit 4, Art. II); that all of the assets and earnings of the corporation shall be used exclusively for these purposes and that "no part of the net earnings shall inure to the benefit of any individual" (id.); that it "shall have no capital stock, pay no dividends, distribute no part of the income to its members, directors or officers" (id., Art. XII); and that upon dissolution all of its property shall be dedicated to the purposes for which it was created and "(under) no circumstances shall any of the assets ..., upon dissolution, be distributed to the members hereof." Id., Art. XII.

 4. Horizon Hospital, Inc. undertook to construct a hospital facility (the Hospital) at Clearwater, Florida. The Hospital was financed through Horizon Hospital, Inc."s issuance of sinking fund bonds. These bonds, issued under a trust indenture dated February 1, 1973, are denominated Horizon Hospital, Inc., Serial Gross Revenue Sinking Fund Bonds, Series I and II (bonds). The bonds bear interest at the rate of 9% and 91/2% per annum and are secured by a first mortgage lien on real property and a first lien on the gross revenue of the Hospital (Trust Indenture and Bond, Plaintiff's Exhibits 2 and 7).

 5. The bonds are not traded on any national securities exchange (Foltz 2.8).

 6. Plaintiff E.H.I. does not claim to hold any of the bonds.

 7. On February 1, 1976, Horizon Hospital, Inc. failed to make a quarterly interest payment to the bondholders and the bonds went into default. (Notice for Vote by Bondholders, September 10, 1980, Defendants' Exhibit 7 at 8). No interest payments have been made on the bonds since June 1, 1979, and as of August 1, 1980, fourteen quarterly interest payments, or approximately $ 4,300,000, are in arrears. Further, no sinking fund payments have been made, although they were scheduled to commence in 1976. (Id. at 8; Foltz 2.88.)

 8. Some of the individuals involved in the original construction and financing of the Hospital were convicted of crimes stemming from their involvement. (Notice for Vote by Bondholders, September 16, 1980, Defendants' Exhibit 7, at 4.)

 9. In March of 1980, plaintiff and the Board of Trustees of Horizon Hospital, Inc. entered into a Lease dated March 29, 1980, which incorporated a letter agreement dated March 18, 1980, with an addendum dated March 19, 1980. (See Lease, Plaintiff's Exhibit 4.) The parties also entered into an option agreement giving E.H.I. the right to purchase the assets of the Hospital. (Option to Purchase, Plaintiff's Exhibit 5.)

 10. Under the terms of the Lease, E.H.I. undertook to lease and manage all of the assets, tangible and intangible, of the Hospital for a term of ten years, terminating March 1, 1990, at an annual rental of $ 1,440,000 payable quarterly. In addition, E.H.I. was given an option to renew the lease for two additional five-year terms. (Lease, Plaintiff's Exhibit 4, Art. 2.01). E.H.I. was obligated to pay an additional $ 360,000 annually, payments to be made commencing September 1, 1981, and ending September 1, 1984, and, together with the above, a sum sufficient to allow redemption of the bonds at face value plus interest. (Id., Art. 3.) The letter agreement and addendum which were incorporated into the lease, provided for an initial $ 500,000 payment, plus what the parties have labelled a balloon payment at the end of the fifth year of the lease. This balloon payment was intended to make sure that the bonds would no longer be in default at the end of the fifth year of the E.H.I. lease. (Foltz at 2.70; Report to the Bondholders, June 5, 1980, Plaintiff's Exhibit 11.)

 12. The E.H.I. lease and option agreement were thus intended to satisfy the outstanding obligation on the bonds. (Report to the Bondholders, June 5, 1980, Plaintiff's Exhibit 11 at 3.)

 13. E.H.I. was entitled to keep any surplus after rental payments and thus intended to make a profit from its operations.

 14. The written approval of the bondholder trustees is a condition precedent to the obligation to pay rent under the lease. (Lease, Plaintiff's Exhibit 5 at Art. 3.02.) It is a matter of dispute whether that approval was ever given. Additionally, no payments have been made by E.H.I. although it is a matter of dispute as to whether E.H.I. has tendered such payments. (Dobbs, 2.141-2.143; Foltz, 2.73-2.77.)

 15. On May 23, 1980, Horizon Hospital, Inc. filed a petition for bankruptcy under Chapter VII of the Bankruptcy Code, 11 U.S.C.A. §§ 701-728 (West Supp.1979). Pursuant to the Bankruptcy Code, all proceedings against Horizon Hospital, Inc. or its property have been stayed. Id. § 362. (Notice of Meeting of Creditors and Automatic Stay, Defendants' Exhibit 6.) Subsequently, on May 30, 1980, the bondholder trustees, at the behest of their counsel Dobbs, converted the proceeding to one for reorganization under Chapter XI of the Code, 11 U.S.C.A. §§ 1102-1174 (West Supp.1979) (Dobbs, 2.137-140).

 16. There are three matters before the bankruptcy court involving E.H.I. Horizon Hospital, Inc. has sued E.H.I. to recover $ 150,000 transferred by it to E.H.I. at the start of the lease term to pay then-existing creditors. E.H.I. has applied to the bankruptcy court for funds to meet E.H.I."s payroll. E.H.I. also claims the assets of two bank accounts that were frozen by the bankruptcy court. In a pleading filed in that action, E.H.I. claims that it owns the Hospital outright. (Dobbs, 3.24-26, 3.27.)

 17. The Hospital is presently being operated without a license as state officials will not grant a license until the bankruptcy proceedings are completed. (Dobbs, 2.161.)

 18. On August 19, 1980, the bondholder trustees, represented by Kutak, Rock & Huie, and Dobbs, entered into an Asset Purchase Agreement with H.A.I. whose obligations under the agreement were guaranteed by its parent, Hospital Affiliates International, Inc. (Asset Purchase Agreement, Defendants' Exhibit 2.) This agreement was amended on August 19, 1980 (Defendants Exhibit 3.)

 19. The asset purchase agreement provided for, among other things, the sale to H.A.I. of all of the tangible real and personal property of Horizon Hospital, Inc. which are pledged as security for the bonds. The agreement, however, specifically excludes from the sale any rights in action which Horizon Hospital, Inc. or the bondholder trustees may have against third parties arising out of the issuance and sale of the bonds or construction or management of the hospital facilities. (Id. § 1.01.) The terms of the agreement provide that the sale will take place only if the bondholder trustees obtain title to the assets essentially free of all liens and encumbrances. (Id. § 3.02.) The sale was also conditioned upon, among other things, the approval of the transaction by the persons holding a majority in principal amount of the bonds. (Id. § 3.01.)

 21. The provision in the agreement calling for bondholder approval was included at the request of the trustees. (Foltz, 2.122.) Neither the indenture nor the bonds themselves give the bondholders the right to vote on such matters. However, their approval was solicited because the bondholder trustees and their counsel felt that it was important to have bondholder approval on such a matter. (Foltz, 2.122; Dobbs, 2.155.)

 22. Plaintiff had no knowledge of the agreement until just prior to the initiation of this lawsuit.

 23. Pursuant to the agreement, on or about September 10, 1980, the bondholder trustees sent a letter entitled, "Notice for Vote by Bondholders" to which was attached a "Ballot Statement" (Defendants' Exhibit 7). In the letter the trustees recommended that the bondholders approve the transaction. The letter does not ask the bondholders to tender their bonds nor does it state that the H.A.I. transaction would satisfy their outstanding claims against Horizon Hospital, Inc.

 24. While the letter states that the bondholder trustees did not presently intend to bring any claims that the bondholders might have against third parties involved in the construction of the Hospital, trustee Foltz testified that they intend to pursue such claims and such claims are presently being litigated. Additionally, Foltz stated that the trustees might have an action against E.H.I. (Foltz, 2.20, 2.23-27; Dobbs, 2.148-149.)

 25. The bondholders approved the H.A.I. transaction. H.A.I. was notified of the approval prior to the issuance of the temporary restraining order. It is not clear whether the ...

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