Arrowsmith v. Lemberg Law, LLC (In re Health Diagnostics Lab., Inc.)

• Citation: 571 B.R. 182
• Decision Date: 30 March 2017
• Docket Number: APN No. 16–03252,Case No. 15–32919–KRH
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: IN RE: HEALTH DIAGNOSTICS LABORATORY, INC., et al., Debtors. Richard Arrowsmith, as Liquidating Trustee of the HDL Liquidating Trust., Plaintiff, v. Lemberg Law, LLC, et al., Defendants.

571 B.R. 182

IN RE: HEALTH DIAGNOSTICS LABORATORY, INC., et al., Debtors.

Richard Arrowsmith, as Liquidating Trustee of the HDL Liquidating Trust., Plaintiff,

v.Lemberg Law, LLC, et al., Defendants.

Case No. 15–32919–KRH

APN No. 16–03252

United States Bankruptcy Court, E.D. Virginia, Richmond Division.

Signed March 30, 2017

Cullen Drescher Speckhart, Wolcott Rivers Gates, Richmond, VA, for Plaintiff.

Ronald A. Page, Jr., Ronald Page, PLC, Jeremy S. Williams, Kutak Rock LLP, Richmond, VA, for Defendants.

MEMORANDUM OPINION

Kevin R. Huennekens, UNITED STATES BANKRUPTCY JUDGE

Before the Court in this adversary proceeding is a motion to dismiss filed by Lemberg Law, LLC ("Lemberg Law") and the Consumers¹ (collectively, the "Defendants") under Bankruptcy Rule 7012 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rule(s)"), which incorporates Civil Rule 12(b)(6) of the Federal Rules of Civil Procedure (the "Civil Rule(s)"), for to failure to state a claim upon which relief can be granted (the "Motion to Dismiss"). The Motion to Dismiss seeks an order from this Court to dismiss the Verified Complaint (the "Complaint") of Richard Arrowsmith, in his capacity as Liquidating Trustee of the HDL Liquidating Trust (the "Liquidating Trustee" or "Plaintiff").² The issue before the Court is whether the Liquidating Trustee's Complaint pleads sufficient facts to present plausible causes of action to survive the Motion to Dismiss. A hearing on the Motion to Dismiss was held on October 20, 2016 (the "Hearing"). At the Hearing, the Court took the Motion to Dismiss under advisement. For the reasons set forth in this Memorandum Opinion, the Court denies the Motion to Dismiss.

Procedural Facts

On June 7, 2015 (the "Petition Date"), the Debtors commenced these bankruptcy Cases by each filing separate voluntary petitions for relief under chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code")³ in the United States Bankruptcy Court for the Eastern District of Virginia (the "Court"). After the Petition Date, the Debtors continued to operate and manage their properties as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. On June 9, 2015, the Court entered an order authorizing the joint administration of the chapter 11 Cases. On June 16, 2015, the United States Trustee for the Eastern District of Virginia appointed a statutory committee of unsecured creditors (the "Committee").⁴ The Court confirmed the Debtors' Modified Second Amended Plan of Liquidation (the "Plan") by order entered May 12, 2016 (the "Confirmation Order").⁵ The HDL Liquidating Trust was formed in accordance with the terms of the Plan on the Effective Date.⁶ Pursuant to the Plan and 11 U.S.C. § 1123, the Liquidating Trustee is the successors of the Debtors and the Committee.

On September 17, 2015, the Court entered an Order (I) Approving Asset Purchase Agreement and Authorizing the Sale of Assets of the Debtors Outside the Ordinary Course of Business, (II) Authorizing the Sale of Assets Free and Clear of All Liens, Claims, Encumbrances and Interest, (III) Authorizing the Assumption and Sale and Assignment of Certain Executory Contracts and Unexpired Leases and (IV) Granting Related Relief (the "Sale Order") which approved the Debtors' sale of substantially all of their assets to True Health Diagnostics, LLC ("True Health") under the terms of an Asset Purchase Agreement ("APA"). The sale under the APA closed on September 29, 2015 (the "Closing Date"). Pursuant to the APA, the Debtors retained ownership of accounts receivable aged 180 days or more as of the Closing Date (the "Excluded Receivables").

HDL

operated an accredited, full service clinical laboratory that provided testing of biomarkers for the indication of risk for cardiovascular disease

, diabetes, and other illnesses. HDL's testing services offered physicians the ability to detect major health issues in patients before potentially life-threatening events occurred. HDL processed lab tests it received from physicians all around the country. The Excluded Receivables include amounts owed to HDL by patients for laboratory testing (the "Excluded Patient Receivables"). The Excluded Patient Receivables are classified by the Liquidating Trustee as: (1) receivables due from patients who received monies in the form of reimbursement from their insurance carriers (the "Paid to Patient Receivables"); (2) receivables due from patients who are solely responsible to pay for laboratory testing they received from HDL; (3) receivables due from patients who are responsible to pay for laboratory testing because they have not yet met their insurance deductibles; and (4) receivables that are due on account of insurance carrier denials.

On or about July 28, 2015, the Liquidating Trustee entered into collection agreements with Monterey Financial Services, LLC, d/b/a Monterey Collections ("Monterey") and other collection agents (collectively, the "Collectors") to pursue collection of certain Excluded Patient Receivables owned by HDL (the "Collection Agreements"). Since HDL engaged the Collectors, the Collectors have transmitted notices to certain patients for whom HDL had performed laboratory testing.

In January 2015, True Health sent cease and desist letters to HDL requesting HDL and related parties to stop collecting the Excluded Patient Receivables. The Liquidating Trustee responded by filing an adversary proceeding⁷ against True Health and Jeffrey P. "Boomer" Cornwell (collectively, the "True Health Defendants") and sought an injunction prohibiting the True Health Defendants from interfering with the efforts of the Liquidating Trustee and the Collectors to collect the Excluded Patient Receivables. On February 6 and 12, 2016, the Court entered injunction orders (the "Injunction Orders") enjoining the True Health Defendants from taking any actions to interfere with HDL's collection of the Excluded Patient Receivables. In the Injunction Orders, the Court held that interference with the efforts of the bankruptcy estate to collect the Excluded Receivables constituted willful violations of section 362(a)(3) of the Bankruptcy Code. No party appealed the Injunction Orders.

Nevertheless, the Liquidating Trustee continued to experience difficulties collecting the Excluded Receivables even after the Injunction Orders had been entered. On June 3, 2016, the Liquidating Trustee filed in the Debtors' bankruptcy Cases a Motion to (A) Enforce the Automatic Stay to Certain Accounts Receivable Constituting Property of the Estate; (B) Extending the Automatic Stay to Collection Entities Acting at the Aid and Direction of the Liquidating Trustee for Purposes of Collecting Such Property for the Benefit of Creditors; and (C) Granting Related Relief under 11 U.S.C. § 105 (the "Motion to Enforce and Extend"). Lemberg Law filed an objection to the Motion to Enforce and Extend and appeared at a hearing conducted on June 6, 2016. The Court approved the Motion to Enforce and Extend over the objection of Lemberg Law, but stated that the order would not prejudice any party's ability to "file a motion for relief from the automatic stay" or "file a complaint in this Court" in the event of a "violation of the Fair [Debt] Collection Practices Act." On July 1, 2016, the Court entered the Order on Motion to (A) Enforce the Automatic Stay To Certain Accounts Receivable Constituting Property of the Estate, (B) Extending the Automatic stay to Collection Entities Acting at the Aid and Direction of the Liquidating Trustee for Purposes of Collecting Such Property for the Benefit of Creditors, and (C) Granting Related Relief Under 11 U.S.C. § 105 (the "Stay Order") which enforced and extended the automatic stay of 11 U.S.C. § 362"to protect the Excluded Receivables from any and all interference and assertion of control by any party other than the Liquidating Trustee." The Stay Order also protected the "Collectors from any and all claims, threats, and actions initiated against the Collectors in respect of the Collectors' work in assist[ing] ... the Liquidating Trustee." No party appealed the Stay Order.

On August 3, 2016, the Liquidating Trustee filed the Complaint against the Defendants. Additionally, the Liquidating Trustee filed a Motion of Plaintiff for an Order to Maintain the Status Quo Ante Pending Final Determination on Merits of Complaint (the "Motion for Preliminary Injunction"). On August 30, 2016, the Court entered the Order Maintaining the Status Quo Ante Pending Final Determination on Merits of Complaint (the "Status Quo Order"). On September, 13, 2016, the Defendants appealed the Status Quo Order to the District Court for the Eastern District of Virginia (the "District Court"). On September 21, 2016, the Defendants filed their Motion to Dismiss. On October 13, 2016, the Liquidating Trustee filed Liquidating Trustee's Opposition to Motion to Dismiss the Complaint by Lemberg Law, LLC and the Consumers (the "Liquidating Trustee's Objection"). On October 19, 2016, the Defendants filed Reply Memorandum of Law in Support of Motion by Lemberg Law and the Consumers to Dismiss the Complaint (the "Defendants' Reply").

At the Hearing, the Court questioned whether it had jurisdiction to hear the Motion to Dismiss since the District Court had granted the Defendants' appeal of the Status Quo Order,⁸ but allowed the parties to address their arguments on the Motion to Dismiss. On February 16, 2017, the United States District Court for the Eastern District of Virginia entered an Order Vacating the Preliminary Injunction Order and Remanding the Case (the "District Court Order Vacating the Status Quo Order").⁹ Now that the adversary proceeding has been remanded by the District Court, this Court has been reinstated with jurisdiction over the Motion to Dismiss.

Jurisdiction and Venue

The Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334(b) and the General Order of Reference from the ...