Donovan v. Rothman

• Decision Date: 18 July 2000
• Docket Number: No. 99 CIV. 11197 (SHS).,99 CIV. 11197 (SHS).
• Parties: Carmel N. DONOVAN, Erich Eidenschenk, David Follett, and Estate of Frank M. Purnell, Individually and as Shareholders of LH Radiologists, P.C., Plaintiffs, v. Lewis ROTHMAN, Stephen Scharf, R.S. Billing Systems, Inc., Lenox Hill Hospital, and LH Radiologists, P.C., Defendants.
• Court: U.S. District Court — Southern District of New York

Page 513

106 F.Supp.2d 513

Carmel N. DONOVAN, Erich Eidenschenk, David Follett, and Estate of Frank M. Purnell, Individually and as Shareholders of LH Radiologists, P.C., Plaintiffs, v. Lewis ROTHMAN, Stephen Scharf, R.S. Billing Systems, Inc., Lenox Hill Hospital, and LH Radiologists, P.C., Defendants.

No. 99 CIV. 11197 (SHS).

United States District Court, S.D. New York.

July 18, 2000.

OPINION & ORDER

STEIN, District Judge.

Four shareholders of LH Radiologists, P.C. brought this shareholders' derivative action in New York Supreme Court against defendants Lewis Rothman, Stephen Scharf, R.S. Billing Systems, Inc., Lenox Hill Hospital (the "Hospital"), and LH Radiologists, P.C. The amended complaint set forth seven causes of action, including allegations that Rothman breached his fiduciary duty as President of LH Radiologists by entering into a fee arrangement with the Hospital that violated the federal Medicare anti-kickback statute, 42 U.S.C. § 1320a-7b(b).

The Hospital subsequently removed this action to this Court pursuant to 28 U.S.C. § 1441(a) on the grounds that the application of the anti-kickback statute presents a substantial federal question. Plaintiffs have now moved to remand this action to New York Supreme Court pursuant to 28 U.S.C. § 1447(c) on the grounds that no substantial federal question has been presented. Because the complaint does not present a substantial federal question, plaintiffs' motion to remand this action is granted.

BACKGROUND

According to the amended complaint, plaintiffs as well as two of the defendants — Lewis Rothman and Stephen Scharf — were radiologists on the staff of Lenox Hill Hospital in the early 1980s. See Am. Compl. ¶¶ 13-14. Those individuals ultimately incorporated LH Radiologists, P.C. as a separate professional corporation through which they provided radiological services pursuant to a fee-for-service arrangement with the Hospital. See id. ¶¶ 16, 26, 28. Each of the radiologists was a shareholder. See id. Rothman was director of the Department of Radiology at the Hospital as well as President of LH Radiologists. See id. ¶¶ 28-29.

Specifically, in December 1987, Rothman, acting on behalf of LH Radiologists, entered into a "Fee For Service Agreement" as well as a separate "Supplemental Agreement" with the Hospital, whereby LH Radiologists would bill patients directly and then forward a portion of the proceeds to the Hospital in accordance with the following terms:

It is hereby agreed that [LH Radiologists'] net annual collections in excess of an amount equal to its actual, usual, ordinary and necessary expenses of operation ... shall be distributed as follows: 66-2/3% to [LH Radiologists]; 25% to a department of Radiology Fund ("the Fund") to be utilized for capital improvements, equipment, and other expenditures for the Department ...; and 8-1/3% to the Hospital for its general purposes. Said amounts shall be estimated and payable quarterly, with adjustments at the end of each annual term.

Id. ¶ 30 (quoting Supplemental Agreement ¶ 1). Pursuant to this provision, LH Radiologists paid or credited the Hospital approximately $3.75 million through October 31, 1998. See id. ¶ 32.

In 1988, Rothman allegedly caused a certificate to issue to himself for all shares of LH Radiologists, thus purporting to make himself the sole shareholder of the corporation. See id. ¶ 34. Subsequently, according to the complaint, Rothman operated LH Radiologists as a sole proprietorship, unilaterally fixed salaries, and engaged in other illegal, improper, and self-dealing transactions, including the transfer of the corporation's billing services business to R.S. Billing Systems, Inc., a separate entity wholly owned by Rothman and Scharf. See id. ¶¶ 35, 42-44, 53-55.

When Rothman refused a request by Donovan and Purnell to inspect the books and records of LH Radiologists, they brought a special proceeding in New York Supreme Court to compel inspection pursuant to N.Y. Business Corporation Law § 624 and New York common law. See id. ¶¶ 36-37. The New York Court of Appeals ultimately affirmed the lower courts' conclusion that plaintiffs were in fact shareholders of LH Radiologists. See In Matter of Estate of Purnell v. LH Radiologists, P.C., 90 N.Y.2d 524, 530-32, 686 N.E.2d 1332, 1335-36, 664 N.Y.S.2d 238 241-42 (1997), aff'g 228 A.D.2d 360, 361-62, 644 N.Y.S.2d 274, 274-75 (1st Dep't 1996).

In 1996, plaintiffs brought this shareholder derivative action in New York Supreme Court alleging breach of fiduciary duty by Rothman and Scharf and naming LH Radiologists as a nominal defendant. Extended motion practice followed. See Donovan v. Rothman, 256 A.D.2d 184, 184-85, 683 N.Y.S.2d 25, 26 (1st Dep't 1998); Donovan v. Rothman, 253 A.D.2d 627, 629-30, 677 N.Y.S.2d 327, 329-30 (1st Dep't 1998).

In late September 1999, Justice Shainswit of New York Supreme Court granted plaintiffs' motion to add the Hospital as a defendant to the claim seeking recovery for breach of fiduciary duty on the grounds that payments made to the Hospital pursuant to the fee-for-services agreement amounted to illegal kickbacks in violation of 42 U.S.C. § 1320a-7b(b).¹ In granting the motion, the Supreme Court reasoned that "[t]he proposed claim against the Hospital seeks recovery of those same funds"; that "[t]he issues as to both claims are largely the same"; and that a separate action against the Hospital would prove unduly wasteful. Donovan v. Rothman, No. 105335/96-010 & 011, slip. op. at 2-3 (N.Y.Sup.Ct. Sept. 29, 1999); Aff. of Joseph H. Einstein, dated Nov. 17, 1999, Ex. B.

The Hospital then removed the entire derivative action to the Southern District of New York pursuant to 28 U.S.C. § 1441(a) on the grounds that the allegations against the Hospital turn on the application of the federal anti-kickback statute and therefore present a substantial federal question. As noted above, plaintiffs have now moved to remand the action to New York Supreme Court pursuant to 28 U.S.C. § 1447(c) on the grounds that no substantial federal question has been presented.

DISCUSSION

28 U.S.C. § 1441(a) provides that "any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending." Pursuant to Section 1447(c), however, "[i]f it appears before final judgment that a case was not properly removed, because it was not within the original jurisdiction of the United States district courts, the district court must remand it to the state court from which it was removed." Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 8, 103 S.Ct. 2841, 2845, 77 L.Ed.2d 420 (1983).

Because the parties to this action are not of diverse citizenship, subject matter jurisdiction is present only if federal question jurisdiction exists. See Fax Telecommunicaciones Inc. v. AT & T, 138 F.3d 479, 486 (2d Cir.1998) (citing Caterpillar Inc. v. Williams, 482 U.S. 386, 392 107 S.Ct. 2425, 2429-30, 96 L.Ed.2d 318 (1987)). Federal question jurisdiction is governed by 28 U.S.C. § 1331, which provides that federal district courts shall have original jurisdiction of all civil actions "arising under" the laws of the United States. To determine whether an action "arises under" federal law, a court must inquire, first, "whether federal law creates the cause of action," and if not, then second, "whether that cause of action poses a substantial federal question." West 14th St. Commercial Corp. v. 5 West 14th Owners Corp., 815 F.2d 188, 193 (2d Cir.1987); see Barbara v. New York Stock Exch., Inc., 99 F.3d 49, 53-54 (2d Cir.1996).

There is no private cause of action to redress violations of the federal antikickback statute, 42 U.S.C. § 1320a-7b(b), the infraction of which is a crime. See, e.g., West Allis Mem. Hosp., Inc. v. Bowen, 852 F.2d 251, 254-55 (7th Cir.1988); American Health Sys., Inc. v. Visiting Nurse Ass'n, No. Civ. A. 93-542, 1994 WL 314313, at *4-5 (E.D.Pa. June 29, 1994). Certainly, the absence of a private right of action in the statute "counsels against a finding of federal question jurisdiction," Barbara, 99 F.3d at 54, and its significance "cannot be overstated," Merrell Dow Pharms. Inc. v. Thompson, 478 U.S. 804, 812, 106 S.Ct. 3229, 3234, 92 L.Ed.2d 650 (1986).

Therefore, this Court must next inquire whether plaintiffs' cause of action against the Hospital presents a substantial federal question by looking "to the nature of the federal interest at stake." West 14th St., 815 F.2d at 193 (citing Merrell Dow, 478 U.S. at 814 n. 12, 106 S.Ct. at 3236 n. 12); see Barbara, 99 F.3d at 54-55. Pursuant to the "well-pleaded complaint" rule, "federal jurisdiction must be found from `what necessarily appears in the plaintiff's statement of his own claim'" in the complaint. West 14th St., 815 F.2d at 192 (quoting Taylor v. Anderson, 234 U.S. 74, 75-76, 34 S.Ct. 724, 58 L.Ed. 1218 (1914)). Accordingly, "a plaintiff as `master of the complaint' may preclude removal by electing to disregard an available federal dimension of a claim and asserting only a distinct state law cause of action." Derrico v. Sheehan Emergency Hosp., 844 F.2d 22, 27 (2d Cir.1988) (citing Caterpillar, 482 U.S. at 392-93, 107 S.Ct. at 2430). However, "a plaintiff cannot avoid removal by artful pleading, i.e., by framing in terms of state law a complaint the `real nature of [which] is federal, regardless of plaintiff's characterization.'" Id. (quoting Travelers Indem. Co. v. Sarkisian, 794 F.2d 754, 758 (2d Cir.1986)).

The amended complaint alleges that Rothman violated his fiduciary duties to the other shareholders by wasting and diverting the company's assets by a variety of methods, including having the company pay $3.75 million to the Hospital pursuant to the Supplemental Agreement. See Am. Compl. ¶¶ 63-64. The complaint names the...