BlueWave Healthcare Consultants, Inc., et al. v. Richard Arrowsmith, Liquidating Trustee, No. 3:2017cv00413 - Document 4 (E.D. Va. 2017)
Court Description: MEMORANDUM OPINION. Signed by District Judge Henry E. Hudson on 07/19/2017. Copy forwarded to Clerk, U.S. Bankruptcy Court (walk, )
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BlueWave Healthcare Consultants, Inc., et al. v. Richard Arrowsmith, Liquidating Trustee = . IN THE UNITED STATES DISTRICT COURT OF VIRGINIA FOR THE EAS i o In re: ) ELH DIAGNOSTIC ) ) LABORATORY, INC., et al., ) ) ) Debtors. Chapter 11 Doc. 4 e E JL I 9 20l7 CERK, U.S. DISTRICT COURT RICHMOND, VA Case No. 15-32919-H (Jointly Administered) ) ) ) ) ICHARD AROWSMITH, LIQUIDATING TRUSTEE OF THE HDL ) LIQUIDATING TRUST, ) ) Plaintif, ) ) v. Bankr. Ct. Adv. Proc. No. 16-3271-KRH ) ) LATONYA S. MALLORY, et al., Dist. Ct. Case No. 3:1 7-cv-413-HEH ) ) Defendants. ) MEMORANDUM OPINION (Denying Motion to Withdraw the Reerence) THIS ATIER is beore the Court on a Motion to Withdraw the Reerence of this adversarial proceeding rom the United States Bankruptcy Court or the Easten District of Virginia ("Bankruptcy Court") to the District Court.1 For the reasons that ollow, the Court will deny the Motion. 1 The Complaint asserts 76 causes of action against I 03 named defendants. The instant Motion was iled by twenty-one of those deendants: BlueWave Healthcare Consultants, Inc., Floyd Calhoun Dent, III,Robert Bradord Johnson,Lakelin Pines LLC,CAE Properties LLC, Blue Eagle Fam,LLC, Blue Eagle Fnn ng LLC, Blue Smash Investments, LLC,Eagle Ray i Invesments LLC,Forse Investments,LLC, Forse Medical Inc., HJ Faming, LLC,War-Horse Properties,LLLP,Cobalt Healthcare Consultants Inc.,Hisway of South Carolina, Inc., Royal Dockets.Justia.com payments made by HDL to BlueWave2 (collectively "Movants"). HDL's oner directors, oficers, and shareholders are also named as defendants but are not seeking to withdraw the reference. 3 Forty-our counts of the Complaint implicate some or all of the Movants. 4 Twenty-eight of Plaintifs claims against Movants seek to avoid HDL's raudulent transers of payments and obligations pursuant to Title 1 1 of the United States Code ("Bankruptcy Code"). The other counts include various statutory and common law causes of action such as raud, conspiracy, and tortious intererence with contracts and business expectancies. Movants now seek to withdraw the reference and have this adversarial action-at least as it applies to them-litigated in the District Court rather than the Bankruptcy Court. II. DISCUSSION Federal district courts have original jurisdiction over all bankruptcy matters. 28 U.S.C. § 1334. However, Congress has provided that a district court may refer its bankruptcy proceedings to a bankruptcy judge or adjudication. 28 U.S.C. § 157(a). Accordingly, by standing order issued on August 1 5, 1 98 4, this Court automatically 2 The Complaint names ity deendants who were allegedly transerees of HDL payments. Eighteen of these deendants have joined the Motion to withdraw the reerence. The other thirty two, who appear to be unailiated with Dent and Johnson,have not. 3 Another group of defendants includes individual independent sales representatives contracted by BlueWave. Most of those individuals have also iled motions to withdraw the reference. Those motions will be addressed in a separate memorandum opinion and order. 4 These include Counts 1,2, 3, 4,5, 6,7, 8,9, 10,11,12, 37, 38, 39, 40, 41, 42, 43,44,45,46, 47,48,49,50,51,52,55,58,59,60,65,66,67,68,69, 70, 71, 72, 73, 74, 75, 76. 3 I. BACKGROUND Health Diagnostic Laboratory, Inc. ("HDL"), based in Richmond, Virginia, was a provider of specialized laboratory services to physicians and other healthcare providers throughout the United States. HDL and its afiliate companies (collectively · Debtors") iled or Chapter 1 1 bankruptcy in the Bankruptcy Court in June 2015. In May 2016, the Banruptcy Court approved the Debtors' Second Amended Plan of Liquidation and appointed Plaintif Richard Arrowsmith ("Plaintif') as trustee of the liquidating tust. On September 16, 20 16, Plainti f initiated this adversarial proceeding by iling a seventy-six count Complaint. The Complaint asserts that HDL and its business partners conspired to pursue a raudulent and illegal business model. They allegedly paid illegal kickbacks to incentivize doctors to use HDL's services, unlawully reused to accept copays to incentivize patients to agree to expensive and unnecessary laboratory tests, and paid unlawul sales commissions to third-party sales agents. The Complaint names as defendants all of the participants in the alleged conspiracy. Those deendants include the current Movants: Floyd Calhoun Dent, III, and Robert Bradord Johnson; their company, BlueWave Healthcare Consultants, Inc. ("BlueWave"), which served as IDL's primary sales agent; and various entities controlled by Dent, Johnson, or their amily members, which were transerees of Blue Medical Inc., Aroc Enterprises LLC,Riverland Pines LLC, Crosspoint Propeties LLC, Helm-Station Investments LLLP,and Trini "D" Island LLC. 2 reers all bankruptcy matters to the Bankruptcy Court. But the Bankruptcy Court's jurisdiction is limited. Thus, in certain situations a case's reference to the Bankruptcy Court may or must be withdrawn back to the District Court. A district court must withdraw the reference where the "resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities afecting interstate commerce." 28 U.S.C. § l 57(d). In all other situations, withdrawal of the reerence is discretionary and is permitted "or cause shown." Id. Movants bear the burden of demonstrating that they are entitled to either mandatory or discretionary withdrawal. In re .S. Aways Group, Inc., 296 B.R. 673, 677 (E.D. Va. 2003). In this case, Movants argue that some of the claims against them require mandatory withdrawal. They also contend that cause exists or the Court to grant discretionary withdrawal as to all the claims they ace. However, the Court inds Movants' arguments unavailing and will deny their Motion in its entirety. a. Mandatory Withdrawal While withdrawal is mandatory when the Court must consider both bankruptcy law and "other laws of the United States," the Fourth Circuit has never addressed how that language should be applied. A majority of courts have determined "that § 157(d)'s [mandatory withdrawal] clause applies only when a proceeding requires 'substantial and material' consideration of non-banruptcy ederal law." Eli Glob., LLC v. Univ. Directories, LLC, 532 B.R. 249, 251 (M.D.N .C. 2015) (intenal citations omitted). This Court reached a similar conclusion in US. Airways Group, holding that "an issue or 4 question of non-bankruptcy federal law must be essential or material to the disposition of the bankruptcy proceeding beore withdrawal of the reference is mandated." 296 B.R. at 679. The .S. Airways Group Court expressly declined to address whether "the material non-banruptcy ederal law issue presented must be novel, dificult, or undecided in the circuit." Id. However, most courts have answered that question in the airmative. Thus, "mandatory withdrawal is required only when those issues require the interpretation, as opposed to mere application, of the non-title 1 1 statute, or when the court must undertake analysis of signiicant open and unresolved issues regarding the non-title 11 law." Matter o icars Ins. Agency. Inc., 96 F.3d 949, 954 (7th Cir. 1996); f see also In re Ionosphere Clubs, Inc., 922 F.2d 984, 995 (2d Cir. 1990) (concluding that withdrawal is not required merely because a case "involves the routine application of a non-Bankruptcy Code federal statute"). In the absence of Fourth Circuit precedent, this Court will adopt the same approach. Movants contend that withdrawal of the reerence is mandatory as to seven of the claims alleged against them. They argue that six of those claims-Counts 3, 4, 39, 40, 47, and 48-require withdrawal because they incorporate the Federal Debt Collection Procedure Act, 28 U.S.C. § § 3301 et seq. ("FDCPA"). Additionally, they contend that Count 74 should be withdrawn because it requires application of the federal Anti Kickback Statute, 42, U.S.C. § 1320a-7b ("AKS"). The Court inds, however, that withdrawal is not mandatory as to these seven claims because they do not require substantial or material consideration of non-bankruptcy ederal law. 5 The claims involving the FDCPA seek to avoid property transers and obligations incurred by the Debtors pursuant to 11 U.S.C. § 544(b). That provision permits a trustee to avoid such transfers and obligations that are "voidable under applicable law." Id. Accordingly, the Complaint seeks to use § 544(b) to avoid transers and obligations that are allegedly raudulent under the FDCPA, 28 U.S.C. § 3304. Movants argue that these claims will require a determination of ( 1) whether the FDCPA constitutes "applicable law" under § 544(b) of the Banruptcy Code, and (2) whether a bankruptcy trustee can step into the shoes of a federal creditor under the FDCPA. Movants contend that because these are unsettled issues on which courts have split, they must be considered by this Court and not the Bankruptcy Court. The Cout disagrees. The issues identiied by Movants are questions of bankruptcy law, which the Baruptcy Court is uniquely qualiied to address. While this particular case will require the Bankruptcy Court to analyze those issues in the context of the FDCPA, the court will not need to give that statute the type of substantial and material consideration compelling withdrawal. Likewise, the mere application of non-bankruptcy ederal law is insuficient to require the withdrawal of Count 74. That claim alleges that the contract between HDL and BlueWave violated the AKS and is thereore invalid under Georgia law. However, resolution of Count 74 will not require an analysis of any signiicant or unresolved issues of federal law. Rather, all that is necessary is a straightoward application of the AKS to the acts of this case. 6 Thereore, Movants have ailed to meet their burden of showing that these claims involve a substantial and material issue of non-bankruptcy federal law. Accordingly, withdrawal is not mandatory, but rests entirely in the Court's discretion. b. Discretionay Withdrawal Even when withdrawal of the reference is not mandatory, § 157(d) permits a court to nonetheless withdraw the reerence or cause shown. While ''cause" is undeined in the statute, courts within the Fourth Circuit have consistently applied six actors in determining whether to grant discretionary withdrawal: "(i) whether the proceeding is core or non-core, l5l (ii) the unionn administration of bankruptcy proceedings, (iii) expediting the bankruptcy process and promoting judicial economy, (iv) the eficient use of debtors' and creditors' resources, (v) the reduction of orum shopping, and (vi) the preservation of the right to a jury trial." In re QS, LLC, 453 B.R. 807, 809-10 (E.D. Va. 2011); see also In re Peanut Corp. o Am., 407 B.R. 862, 865 (W.D. Va. 2009); f ieira v. AG, J, LLC, 366 B.R. 532, 538 (D.S.C. 2007). No single actor is dispositive, rather "discretionary withdrawal of reference should be determined on a case-by-case basis by weighing all the actors presented in a particular case." .S. Aivys Group, 296 B.R. at 682. s Pursuant to 28 U.S.C. § 157, bankruptcy courts have the authority to enter inal orders and judgments in "all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11." 28 U.S.C. § l 57(b)(l ). The bankruptcy courts may also hear proceedings that are non-core if they are "otherwise related to a case under title 11." 28 U.S.C. § 157(c)(l). However, the bakruptcy court's jurisdiction in non-core proceedings is limited to submitting proposed indings of act and conclusions of law to the district court or de novo review and entry of inal order or judgment. Id; Executive Beneits Ins. Agency v. Arkison, 2172 (2014). 7 134 S. Ct. 2165, Movants assert that cause exists to withdraw the reforence as to all ory-our counts alleged against them. However, the Court inds that the six actors or discretionary withdrawal overwhelmingly weigh in avor of denying the Motion. The Court will thereore decline to withdraw the reference to provide uniorm administration of the banuptcy proceedings and to preseve the parties' and judicial resources. Movants' argument or discretionary withdrawal relies almost entirely on the irst and last actors of the six-actor analytical ramework. They contend, and Plaintif appears to concede, that the majority of the claims against Movants are non-core and that at least some of the claims are ones to which Movants are entitled to a jury trial. The practical efect of either non-core claims or a juy right is that this Court will eventually need to hold a trial and enter inal judgment.6 While these actors do appear to weigh in Movants' avor, neither the existence of non-core claims nor the requirement that a jury trial must be held in this Court means "that the bankruptcy court immediately loses jurisdiction of the entire mater or that the district court cannot delegate to the bankruptcy court the responsibiliy or supervising discovery, conducting pre-trial conerences, and other matters short of the jury selection and trial." In re Stansbuy Poplar Place, Inc., 13 F.3d 122, 128 (4th Cir. 1 993); see also US. Airways Group, 296 B.R. at 682 n.22. (dismissing the argument that the de novo review required or non-core claims is itself suficient to justiy withdrawal because it 6 The Bankruptcy Court has the authority to conduct a jury trial pursuant to 28 U.S.C. § 157(e). However, the Bankruptcy Court may only do so with the District Court's authorization and the pties' consent. Id Here, the Movants have withheld consent to a jury trial in the Bankuptcy Court. 8 "would lead to the nonsensical conclusion that all references should be withdrawn since all dispositive matters resolved by the bankruptcy court may be appealed to the district cout"). So the question becomes whether, despite the existence of non-core claims and a right to a jury trial, it would be more economical and eficient or the Bankruptcy Court to oversee the litigation of these claims up until trial. The Court inds that it would. Withdrawing the reerence as to Movants at this stage of the litigation would result in a waste of judicial resources and would urther complicate this already complex litigation. If the Court were to withdraw the reference, almost all of the claims at issue would be simultaneously litigated in both the District Court and Bankruptcy Court. Indeed, thirty-nine of the orty-our counts alleged against Movants also implicate nonmovant Deendants. Moreover, all of the Complaint's allegations are interrelated, involving HDL's allegedly raudulent business model. Movants are alleged to have played a key role perpetrating that raud. Withdrawal of the reference as to Movants would result in the courts duplicating eforts or administration of discovery and disposition of pretrial motions-with potentially disparate results. Accordingly, actors two, three, and our weigh heavily in avor of denying the Motion to Withdraw the Reerence. 7 7 The ith actor, which considers the efect of orum shopping, is efectively neutral in this case and has minimal impact on the Court's analysis. Every motion to withdraw the reerence necessarily contemplates he changing of orum. And certainly Movants believe they will receive some beneit by litigating in the District Court-even if only a more expeditious resoluti on of their claims-otherwise they would not have gone through the expense of iling the instant Motions. However,this is not the type of orum shopping that would prejudice Plaintif in any way beyond uniormity and eiciency already addressed in the other factors. 9 Thereore, or the sake of judicial economy, eficient use of the parties' resources, and the uniorm administration of the bankruptcy proceeding, the Court will decline to exercise its discretion to withdraw the reference. III. CONCLUSION For the reasons stated above, Movants' Motion to Withdraw the Reference will be denied. The Court will direct the Bankruptcy Court to issue a Report and Recommendation at the conclusion of the pretrial phase of this adversarial proceeding. The Bankruptcy Court shall recommend whether any motions or summary judgment of non-core matters should be granted by the District Court and whether the reerence should be withdrawn or trial by jury. n appropriate Order will accompany this Memorandum Opinion. Isl Henry E. Hudson United States District Judge rlj l4 10 \ Date: Richmon , VA 10
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