Infinity Emergency Mgmt. Grp., LLC v. Neighbors Health Sys., Inc. (In re Neighbors Legacy Holdings, Inc.)
| Decision Date | 02 September 2022 |
| Docket Number | Case No: 18-33836,Adversary No. 18-3276 |
| Citation | 645 B.R. 864 |
| Parties | IN RE: NEIGHBORS LEGACY HOLDINGS, INC. et al., Debtors. Infinity Emergency Management Group, LLC, Plaintiff, v. Neighbors Health System, Inc., et al., Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Clifford Hugh Walston, Walston, PC, Houston, TX, Michael D. Warner, Pachulski Stang Ziehl & Jones LLP, Houston, TX, for Trustee Mark Shapiro.
Heather Kristine Hatfield, Eric Michael English, Porter Hedges LLP, Houston, TX, for Trustee Tensie Axton.
Mark S. Finkelstein, Shannon, Martin, Finkelstein, Alvarado & Dunne, P.C., Houston, TX, Paul D. Flack, Pratt and Flack LLP, Houston, TX, for Defendant Setul G. Patel, M.D.
John F. Higgins, IV, Clay M. Steely, Porter Hedges LLP, Houston, TX, for Defendant Neighbors GP, LLC.
Sara Jamieson Sherman, Millard A. Johnson, Johnson DeLuca Kennedy & Kurisky, P.C., Houston, TX, for Defendant Cyril Gillman, M.D.
Christina Minshew Lewis, Moyer Lewis LLP, Houston, TX, for Defendant Dharmesh Patel, M.D.
James G. Munisteri, Foley Gardere, Houston, TX, for Defendant Andy Chen, M.D.
John Wesley Wauson, Wauson Probus, Sugar Land, TX, Matthew Brian Probus, The Probus Law Firm, Houston, TX, for Plaintiff Infinity Emergency Management Group, LLC.
Infinity Emergency Management Group, LLC accuses Neighbors Health System, Inc., its former officers and directors, and its new manager of fiduciary and contract breaches, outright fraud, and other corporate malfeasance. Infinity's accusations arise from its investment in freestanding emergency rooms set up by Neighbors Health. In short, Infinity alleges that as Neighbors Health hurtled toward bankruptcy, it began disregarding the fiduciary and contractual duties it owed Infinity. That disregard in turn inflicted financial damage on Infinity and deprived Infinity of the benefit of its investment. Neighbors Health, along with its officers and directors, argue Infinity cannot maintain its suit because Infinity lacks standing, fails to adequately plead its claims, or does not state claims on which relief can be granted.
Infinity failed to establish its standing to assert a derivative fiduciary breach claim. Relief cannot be granted on Infinity's negligence claims, fraud-based claims, civil conspiracy claim, and aiding and abetting claim. Infinity's Texas Securities Act claim against the Neighbors O&Ds, except for Dr. Setul Patel and Dr. Paul Alleyne, must also be dismissed. Finally, the Creditor Trustee's fraudulent transfer claims against Infinity must be dismissed.
This lawsuit survives as to Infinity's derivative breach of contract claim against Neighbors Health, its negligent misrepresentation claim against Drs. Patel and Alleyne, and its Texas Securities Act claim against Drs. Patel and Alleyne.
Almost five years have passed since Infinity Emergency Management Group, LLC sued Neighbors Health System, Inc., some of its affiliates, and its officers and directors in Texas state court for various corporate wrongs. (ECF No. 1 at 2). Soon after Infinity commenced its state court suit, Neighbors Health and its affiliate debtors1 filed for Chapter 11 relief, which led to the suit's removal to this Court. (ECF No. 1 at 2). Since arriving here, Infinity has amended its Complaint five times, the parties have exchanged significant discovery and multiple rounds of dispositive briefing, and the Court has issued a lengthy Memorandum Opinion2 addressing Infinity's derivative standing. Now, the parties’ Rule 12 motions are ripe for adjudication.
In 2008, a group of emergency room doctors founded the Neighbors Health Network to operate freestanding emergency centers throughout Texas. (Case No. 18-33836, ECF No. 16 at 3). That group included the officers and directors named in this suit: Dr. Paul Alleyne, Dr. Cyril Gillman, Dr. Michael Change, Dr. Andy Chang, Dr. Quang Henderson, Dr. Setul Patel,3 Dr. Hitesh Patel, and Dr. Dharmesh Patel (collectively, the "Neighbors O&Ds"). (ECF No. 102 at 4). In 2011, the Neighbors Network began expanding its operations at the direction of the Neighbors O&Ds. (Case No. 18-33836, ECF No. 16 at 5). To facilitate this expansion, the Neighbors Network established a web of corporate entities to own and operate a Texas-wide network of freestanding emergency centers. (See Case No. 18-33836, ECF No. 16 at 5).
Generally, each freestanding emergency center was set up as a separate limited partnership. (Case No. 18-33836, ECF No. 16 at 7). Neighbors GP, LLC acted as each emergency center's general partner and separate, emergency-center-specific limited liability companies acted as limited partners. (Case No. 18-33836, ECF No. 16 at 7). The Neighbors O&Ds owned a portion of each emergency-center-specific LLC and outside investors owned the remaining interest in each specific entity. (Case No. 18-33836, ECF No. 16 at 7–8). The Neighbors Network, acting at the direction of the Neighbors O&Ds, also established entities to provide management and administrative services to each freestanding emergency center. (Case No. 18-33836, ECF No. 16 at 8). A series of written agreements enumerated the rights and duties each entity had with respect to other Neighbors Network entities. (See ECF No. 98 at 6).
Dr. Samara Bowen and her husband, Jermaine Bowen, formed Infinity in mid-2014. The Bowens did so after two of the Neighbors O&Ds, Dr. Setul Patel and Dr. Alleyne, solicited the Bowens’ investment in the Neighbors Network. (ECF No. 102 at 5). Ultimately, the Bowens, along with other emergency physicians in the area, invested in two emergency-center specific LLCs: Series 114–Eastside, LLC and Series 115–Zaragoza, LLC (together, the "Series LLCs"). (ECF No. 102 at 7–8).
Infinity purchased a 65%, non-voting interest in each of the two Series LLCs. (ECF No. 102 at 7–8). The brick-and-mortar emergency centers associated with the Series LLCs were NEC Eastside Emergency Center, LP and NEC Zaragoza Emergency Center, LP (together, the "Center LPs"). (ECF No. 98 at 3–4). In line with the Neighbors Network's typical corporate structure, Neighbors GP held a 1% interest in the two LPs and NHS LLC held the remaining 99% interest. (Case No. 18-33836, ECF No. 16 at 7). NHS LLC established the Series LLCs to operate the two Center LPs. (ECF No. 98 at 3). Infinity, as a Series LLC owner, was charged with providing physicians to staff the two Center LPs. (ECF No. 98 at 4). However, Neighbors Health, through five subsidiaries, was responsible for the two Center LPs’ "management and corporate functions." (ECF No. 98 at 3). Infinity alleges that the Neighbors O&Ds controlled Neighbors Health, thereby controlling the five management subsidiaries. (ECF No. 102 at 8). Because the Neighbors O&Ds controlled Neighbors Health's management subsidiaries, Infinity contends that the Neighbors O&Ds effectively controlled the two Center LPs and the two Series LLCs. (ECF No. 102 at 8).
Under the agreements that defined Infinity's relationship with the Neighbors Network,4 Infinity's investment entitled it to share in the two Center LPs’ profits and losses. (See ECF No. 98 at 20). Essentially, the Center LPs would bill patients for services rendered, Center LP expenses would be deducted from that revenue, and the net proceeds would be transferred to NHS LLC. (ECF No. 98 at 25). Once NHS LLC received the Center LPs’ net profits, NHS LLC would allocate those profits to the appropriate Series LLCs. (ECF No. 98 at 25). These profits were purportedly reserved for the Series LLC owners (i.e., Infinity). (ECF No. 98 at 5). Neighbors Health, through its managerial subsidiaries, was charged with ensuring profits reserved for the Series LLC owners made it from the Center LPs to the Series LLCs. (See ECF No. 98 at 6, 8, 20).
Infinity alleges that the Neighbors O&Ds fraudulently induced Infinity into investing in the two Series LLCs, then failed to uphold the contractual and fiduciary duties owed to Infinity. Infinity also levies its allegations against Tensie Axton, the Trustee of the NLH Liquidating Trust, because the Liquidating Trustee is the "successor-in-interest to Neighbors Health System, Inc. and NHS Emergency Centers, LLC." (ECF No. 102 at 3).5 Infinity asserts both direct and derivative claims based on its allegations.
Infinity asserts its derivative claims on behalf of the two Series LLCs in which Infinity held ownership interests. Generally, Infinity contends that Neighbors Health and the Neighbors O&Ds failed to "properly maintain and protect" the two Series LLCs’ property, from which Infinity's distributions were derived. (ECF No. 102 at 14–15). Infinity's derivative claims include:
(1) Derivative Breach of Fiduciary Duty, Negligent and Gross Mismanagement, and Abuse of Control against Neighbors Health and the Neighbors O&Ds for causing Series LLC property to be withheld from the Series LLCs, causing physicians fees to be withheld from the Series LLCs’ net profits calculation, and "causing confusion over the ownership of limited partnership interests" in the Center LPs, (ECF No. 102 at 18–21); and (2) Derivative Breach of Contract based on Neighbors Health's breach of its Management Agreement with the Series LLCs, (ECF No. 102 at 21–22).
Infinity alleges it has standing to assert its derivative claims under section 101.463 of the Texas Business Organizations Code. (ECF No. 102 at 15). Under section 101.463, Infinity could assert derivative standing to bring claims on behalf of closely held LLCs (e.g., the Series LLCs). (ECF No. 102 at 15). Section 101.463 would also allow Infinity to dispense with the usual requirement of making a pre-suit demand on Series LLC management. (See ECF No. 102 at 15). Alternatively, Infinity maintains that any pre-suit demand to Neighbors Health or the Liquidating Trustee would...
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