In Re: Soporex Inc. Et Al., CASE NO. 08-34174-BJH-7

CourtUnited States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas
Docket NumberCASE NO. 08-34174-BJH-7,ADV. PRO. NO. 10-3126-BJH
Decision Date07 March 2011

The following constitutes the ruling of the court and has the force and effect therein described.


On May 5, 2010, Diane G. Reed as Chapter 7 Trustee (the "Trustee") of Soporex, Inc.("Inc.") and Soporex Respiratory, Inc., d/b/a Independence Home Pharmacy ("Respiratory" and, together with Inc., "Soporex")1 filed the above-captioned adversary proceeding against Carecentric National, LLC ("CCN"), Carecentric, Inc. ("CCI"), Mestek, Inc. ("Mestek"), Stewart B. Reed ("Reed"), Lyle W. Newkirk ("Newkirk"), Ralph Capasso ("Capasso"), Stephen M. Shea ("Shea"), Steven F. Olearcek ("Olearcek") (collectively, the "Group Defendants") and John R. Festa ("Festa"). The Trustee alleges that (1) CCN was owned directly or indirectly by Mestek and/or CCI, (2) CCN is the counter-party to a pre-petition contract with Inc., (3) Mestek is a privately-held corporation controlled and/or wholly-owned and operated by Reed and his father John Reed, (4) Reed is a director of Mestek and CCI, (5) Festa is President and Chief Executive Officer of CCI, (6) Newkirk, Capasso and Shea are officers of CCI, and (7) Shea and Olearcek are officers of Mestek.

The Group Defendants and Festa have moved to dismiss the Trustee's complaint (the "Complaint"). The Group Defendants filed their motion to dismiss the Complaint on July 2, 2010 (the "Group Defendants' Motion"). On that same date, Festa also filed his motion to dismiss the Complaint (the "Festa Motion") (collectively, the "Motions"). After extensive briefing, the Court heard the Motions on October 5, 2010. The parties filed further post-hearing briefs, following which the Court took the Motions under advisement. This Memorandum Opinion and Order constitutes the Court's findings of fact and conclusions of law to the extent required by Fed. R. Bankr. P. 7052. The Court has jurisdiction over the parties and subject matter pursuant to 28 U.S.C. §§ 157 and 1334.


Prior to its bankruptcy filing, Respiratory (which was wholly-owned by Inc.) provided physician-prescribed medications and related supplies and equipment to patients afflicted with chronic respiratory disorders. In the Complaint, the Trustee alleges that Soporex2 acquired a very large number of active and inactive respiratory patient accounts in 2006 under an asset purchase agreement, and that at the time of the acquisition, Soporex did not have data processing systems in place sufficient to process prescriptions for that number of patients, nor for the billing and collection of charges for the prescriptions to be filled. Most of the patients were served by Medicare, such that much of Soporex's revenue would be derived from billing through Medicare's reimbursement program. Because Soporex did not have the necessary data processing systems in place, Inc. entered into an agreement with CCN, whereby CCN was to provide software and billing services for Soporex with respect to its approximately 26,500 active patients (the "Contract"). The Trustee further alleges that during the course of the parties' relationship, Soporex paid approximately $2.1 million in fees for CCN's billing services. The Trustee further alleges that the billing services were negligently performed, resulting in uncollectible accounts receivable, and that the defendants misrepresented CCN's ability to fix the problems with billings to induce Soporex to continue to do business with CCN. The Trustee further alleges that when Soporex discovered CCN's inability to fix the billing difficulties, it planned to transfer the billing functions to an "in-house" system, but when CCN, Mestek and CCI learned of Soporex's intentions, they gave instructions to discontinue Soporex'saccess to its own accounts and records, resulting in Soporex losing all of its billings.

The Complaint is asserted on behalf of both Inc. and Respiratory, with very little differentiation between them in the Complaint. Count 1 of the Complaint, against CCN, alleges breach of contract.3 Count 2 of the Complaint, against all defendants, 4 alleges negligence in the performance of the billing and collection services and the duties under taken or assigned to the munder the Contract.5 Count 3 of the Complaint, against all defendants, alleges negligent misrepresentations.6 Count 4 of the Complaint alleges conversion as a result of Soporex being denied access to the database containing Soporex's customer data.7 In Count 5 of the Complaint, the Trustee seeksdisallowance of CCN's proofs of claim, on the ground that she disputes that Soporex owes any money to CCN.8 In Count 6 of the Complaint, the Trustee seeks her attorney's fees "to the extent permitted by the Agreement and applicable law." Compl. ¶71. In the Complaint's prayer for relief, the Trustee seeks damages of $20 million, attorney's fees and costs, post-judgment interest, and disallowance of CCN's proofs of claim.


As noted earlier, both Festa and the Group Defendants have moved to dismiss the Complaint. As framed by Festa and not disputed by the Trustee, the only claims asserted against Festa are Counts 2 and 3-for negligence and negligent misrepresentation.9 The Trustee asserts state-law claims for negligence, negligent misrepresentation and conversion against certain of the Group Defendants. To the extent the issues raised by Festa and the Group Defendants overlap, the Court will analyze those issues together.

A. Which Choice of Law Rule Should this Court Apply-Federal or Forum State?

Festa and the Group Defendants argue that the allegations in the Complaint must be judged under Texas law, because although the Fifth Circuit has not yet ruled on whether bankruptcy courtsshould apply federal or state choice of law rules, the majority, and better, view is that a bankruptcy court should apply the choice of law rules of the forum in which they sit. Festa and the Group Defendants then argue that application of Texas's choice of law rules leads to the application of Texas law, as Texas bears the "most significant relationship" to the dispute between the parties.

In contrast, the Trustee asserts that this Court need not decide whether to apply federal choice of law rules or Texas choice of law rules, because both reach the same result-i.e, that Georgia substantive law should apply to the tort claims against Festa and the Group Defendants. The Trustee also points out that the Contract contains a choice-of-law provision dictating the application of Georgia law.

The determination of which state's law applies is significant, in part because Texas has a two-year statute of limitations for the claims asserted in Counts 2 and 3 and Georgia has a four-year statute of limitations. In addition, the parties take the position that Texas and Georgia have differing standards (1) for the existence of a legal "duty" with respect to the liability of a corporate employee for allegedly negligent acts, and (2) with respect to whether contractual privity is required in order for a defendant to be protected by the economic loss rule, which prevents recovery in tort upon claims that assert as damages only the economic loss resulting from a contractual relationship. Moreover, the Trustee relies upon a Georgia statute for her entitlement to attorney's fees.

In deciding which state's substantive law governs the issues before the Court, the Court must first determine which choice-of-law rules should be applied. Schmermerhorn v. Centurytel, Inc. (In re Skyport Global Commc'n, Inc.), No 10-3150, 2011 WL 111427 (Bankr. S.D. Tex. Jan. 13, 2011). It is well-settled that a federal court sitting in diversity must apply the choice of law rules of the forum state in which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941). However, neitherthe United States Supreme Court nor the Fifth Circuit have ruled upon whether a bankruptcy court, which sits not in diversity but by virtue of 28 U.S.C. § 1334, is required to apply federal choice of law rules or is instead to apply the choice of law rules of the forum state with respect to state law claims. However, this Court need not resolve this issue here, since application of both the federal choice of law rules and the Texas choice of law rules would lead this Court to analyze the same factors in determining which state's substantive law should apply to the Trustee's claims. See, e.g., Woods-Tucker Leasing Corp. v. Hutcheson-Ingram Dev. Co., 642 F.2d 744, 749 (5th Cir. 1981) ("application of an independent federal choice of law rule and of the forum state's choice of law rule would lead to the same result, and thus 'we do not determine which road the trial court should have traveled to arrive at the common destination'") (quoting Fahs v. Martin, 224 F.2d 387, 399 (5th Cir. 1955)). As recently noted in this district,

The federal choice-of-law rule is the "independent judgment" test, which is a "multi-factor, contacts analysis" that applies the law of the state with the most significant relationship to the transaction at issue. Texas applies the Restatement's most-significant relationship test to decide choice-of-law issues. The independent-judgment test and the most-significant-relationship test are the same...."

MC Asset Recovery, LLC. v. Commerzbank AG, 441 B.R. 791, 805 (N.D. Tex. 2010); see Tow v. Schumann Rafizadeh (In re Cyrus II P'Ship), 413 B.R. 609, 615 (Bankr. S.D. Tex. 2008) (the independent judgment test or the most significant contacts test is "essentially synonymous with the 'most significant relationship'...

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