Fort v. Kibbey (In re, LabSource, LLC)
Decision Date | 19 April 2022 |
Docket Number | C. A. 19-05161-HB,Adv. Pro. 21-80059-HB |
Parties | In re Labsource, LLC, Debtor(s). v. Aaron Kibbey, individually and as Chief Restructuring Officer of Oaktree Medical Centre, PC; Timothy Daileader, individually and as Independent Director of Oaktree Medical Centre, PC; Huron Consulting Services, LLC aka Huron Consulting Group; Mark Freedlander, David Pivnick, McGuireWoods LLP, Defendant(s). John K. Fort, Trustee, Plaintiff(s), |
Court | U.S. Bankruptcy Court — District of South Carolina |
THIS MATTER is before the Court on the Motion to Dismiss filed by Defendants McGuireWoods, LLP ("MGW"), Mark Freedlander, and David Pivnick (collectively, "MGW Defendants"), seeking dismissal of the Amended Complaint filed by John K. Fort, Chapter 7 Trustee for the bankruptcy estates of Oaktree Medical Centre, P.C., Oaktree Medical Centre, LLC, and Labsource, LLC (collectively "Debtors").[1] The MGW Defendants contend the Court should dismiss certain causes of action pursuant to Fed.R.Civ.P. 12(b)(1)[2] because the Trustee lacks standing, and under Fed.R.Civ.P. 12(b)(6) because they fail to state a claim for relief.
Summary of Allegations of the Amended Complaint[3]
This adversary proceeding concerns issues with the performance of various professionals retained by the Debtors to aid in their restructuring. Debtors comprised a pain management practice privately owned by Daniel McCollum. While operating, Debtors entered an agreement with Fidus Investment Corporation and West Family Investments (collectively, the "Lenders") for a $14, 000, 000.00 senior secured credit facility. After Debtors failed to repay the Lenders on the maturity date, the Lenders exercised one of their contractual remedies in July 2018 by terminating McCollum's rights to exercise control over the Debtors. The Lenders also appointed Defendant Tim Daileader as an Independent Director/Manager with authority and control over the Debtors' day-to-day management, financials, and operations.
Daileader acknowledged the Debtors were subject to varying degrees of financial distress exemplified by, among other things, their failure to timely pay withholding tax obligations and inability to pay the Lenders upon maturity of the credit facility. Soon after becoming Independent Director, Daileader realized the Debtors' financial issues resulted largely from a lack of oversight and qualified management. On or about July 2018, Daileader retained MGW on behalf of the Debtors for the limited capacity as work-out counsel with respect to the Lenders. This encompassed regulatory compliance necessary to refinance the credit facility, including the proper implementation of a management services organization ("MSO").[4] Prior to its engagement, MGW represented itself as having large healthcare and mergers and acquisitions practices with experience in transactions similar to the sale of the Debtors that were being explored at that time. Freedlander and Pivnick are attorneys at MGW.
Further complications with the Debtors' operations arose during MGW's retention, including raids conducted by the Federal Bureau of Investigation, Drug Enforcement Agency, and U.S. Department of Health and Human Services at various facilities of the Debtors on October 30, 2018. At that time, pending refinancing efforts were terminated and the roles of outside professionals were expanded. MGW was to now provide restructuring, corporate, and healthcare legal services to the entire enterprise. Debtors also retained Defendant Aaron Kibbey (an employee of Defendant Huron Consulting Services, LLC) as MSO-level Chief Restructuring Officer in November 2018.
Despite the employment of these professionals and expansion of their involvement, there still did not appear to be progress toward a corporate restructuring. Additionally, by April 2019 Debtors borrowed more from Lenders, which exceeded $5, 000, 000.00, to pay their professional fees and make interest payments on prior loans. The Trustee asserts these substantial fees resulted, in part, from excessive billing by MGW, which had 50 attorneys billing the Debtors during its engagement as counsel. Even though other members of management expressed to Daileader and Huron the professional fees were unnecessary and unsustainable, MGW remained in its role as counsel for the Debtors.
Despite working for the Debtors for approximately one year and incurring significant fees, the professionals failed to effectuate an MSO, and no restructuring plan was developed or implemented. When the professionals realized a restructuring was not tenable, they proposed a Chapter 11 reorganization in July 2019 that required an additional $5, 000, 000.00 in funding from the Lenders. After the Lenders refused to loan further amounts or fund a Chapter 11 reorganization, Chapter 7 preparations began.
On September 18, 2019, Debtors paid Huron and MGW their final invoices, with $61, 620.00 wired to MGW. The next day, Debtors filed separate voluntary petitions for Chapter 7 relief in the U.S. Bankruptcy Court for the Western District of North Carolina. Venue was transferred to this Court on September 30, 2019, and the Trustee was appointed in all three cases. The Trustee asserts these professionals mismanaged the Debtors, thereby harming the estates and ultimately all creditors by diminishing the Debtors' assets, increasing the Debtors' liabilities, and prioritizing payment of their own professional fees over payments to creditors while operating the Debtors and/or working for the Debtors in a fiduciary capacity.
On September 17, 2021, the Trustee filed this adversary proceeding. After the MGW Defendants and others filed motions to dismiss, the Trustee filed an Amended Complaint on December 7, 2021, addressing deficiencies. The Trustee asserts the MGW Defendants owed professional duties to the Debtors and, upon their insolvency, to the Debtors' creditors. The Trustee alleges MGW and Freedlander knew from the outset that the Debtors' situation was dire but were eager to be involved for as long as possible because of the considerable attorneys' fees the matter generated. The Trustee asserts the MGW Defendants and others did not perform as intended, breached their duties, caused damage to the Debtors and, consequently, damage to all creditors. Specifically, the MGW Defendants depleted the Debtors' cash by being paid professional fees of approximately $1, 458, 637.08 while the Debtors' liabilities grew. Therefore, the Trustee claims he is entitled to damages on behalf of the Debtors' estates and/or the creditors by asserting the following causes of action against the MGW Defendants: Breach of Fiduciary Duty; Aiding and Abetting Breach of Fiduciary Duty; Negligence/Professional Malpractice; Civil Conspiracy; Unjust Enrichment; Actual Fraud under § 548(a)(1)(A); Constructive Fraud under § 548(a)(1)(B); Preference under § 547; Unreasonable Compensation under § 329; Recovery of All Transfers under § 550; and Breach of Contract.
The MGW Defendants argue that to the extent the state law causes of action (i.e., Breach of Fiduciary Duty, Aiding and Abetting Breach of Fiduciary Duty, Negligence/Professional Malpractice, Civil Conspiracy, and Unjust Enrichment) are asserted on behalf of creditors, they are entitled to dismissal under Rule 12(b)(1) because the Trustee lacks standing. The MGW Defendants also assert the causes of action for Breach of Fiduciary Duty, Aiding and Abetting Breach of Fiduciary Duty, Negligence/Professional Malpractice, Civil Conspiracy, Unjust Enrichment, and Preference under § 547 should be dismissed under Rule 12(b)(6). The Motion has been fully briefed[5] and is ripe for disposition.
The Amended Complaint alleges this Court has jurisdiction under 28 U.S.C. § 1334 and this matter is a core proceeding under 28 U.S.C. § 157(b)(2). To the extent Article III of the Constitution does not permit any cause of action asserted herein to be treated as "core," the Trustee consents to this Court entering final orders or judgment pursuant to 28 U.S.C. § 157(c)(2). The MGW Defendants assert this Court lacks jurisdiction under 28 U.S.C. §§ 157 and 1334 to preside over the state law causes of action because they do not arise under Title 11, arise in or are related to cases under Title 11 and are not "core proceedings."[6]
The Trustee's claims, including the state law causes of action, appear at a minimum related to the Debtors' Chapter 7 bankruptcy cases. Accordingly, the U.S. District Court for the District of South Carolina has jurisdiction under 28 U.S.C. § 1334(b). Pursuant to 28 U.S.C. § 157(a) and Local Civ. Rule 83.IX.01 (D.S.C.), the district court has referred this proceeding to this Court. If it is determined that this Court lacks authority to enter this Order as a final order, the Court submits this determination as proposed findings of fact and conclusions of law to the district court for review at the appropriate time. See Exec. Benefits Ins. Agency v. Arkison, 573 U.S. 25, 28 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014).[7]
A motion filed under Rule 12(b)(6) challenges the legal sufficiency of the complaint and provides that a party may move to dismiss for failure to state a claim upon which relief can be granted. The legal sufficiency of the complaint is measured by whether it meets the standards for a pleading set forth in Rules 8 and 12(b)(6). Francis v Giacomelli, 588 F.3d 186, 192 (4th Cir. 2009). Rule 8 requires the complaint contain "a short and plain statement of the claim showing that the pleader is entitled to relief." ...
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