Robichaux v. Moses H. Cone Mem'l Hosp. Operating Corp. (In re Randolph Hosp., Inc.), Case No. 20-10247

• Citation: 644 B.R. 446
• Docket Number: Case No. 20-10247,Adv. Pro. No. 22-02002
• Decision Date: 05 August 2022
• Parties: IN RE RANDOLPH HOSPITAL, INC. d/b/a Randolph Health, Debtors. Louis E. Robichaux, IV, as Liquidation Trustee of Randolph Health Liquidation Trust, Plaintiff, v. The Moses H. Cone Memorial Hospital Operating Corporation d/b/a/ Cone Health, Moses Cone Physician Services, Inc. d/b/a Triad Hospitalists, and American Healthcare Systems, LLC, Defendants.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Middle District of North Carolina

644 B.R. 446

IN RE RANDOLPH HOSPITAL, INC. d/b/a Randolph Health, Debtors.¹

Louis E. Robichaux, IV, as Liquidation Trustee of Randolph Health Liquidation Trust, Plaintiff,

v.The Moses H. Cone Memorial Hospital Operating Corporation d/b/a/ Cone Health, Moses Cone Physician Services, Inc. d/b/a Triad Hospitalists, and American Healthcare Systems, LLC, Defendants.

Case No. 20-10247

Adv. Pro. No. 22-02002

United States Bankruptcy Court, M.D. North Carolina.

Signed August 5, 2022

Paul T. Collins, Graham S. Mitchell, Nelson Mullins Riley & Scarborough, LLP, Columbia, SC, Jody Bedenbaugh, Columbia, SC, Rebecca F. Redwine, Hendren Redwine & Malone, PLLC, Raleigh, NC, for Plaintiff.

Thomas W. Waldrep, Jr., Waldrep Wall Babcock & Bailey PLLC, Winston-Salem, NC, for Defendants.

MEMORANDUM OPINION

Lena Mansori James, United States Bankruptcy Judge

This adversary proceeding comes before the Court upon (1) the motion to dismiss and supporting brief filed by The Moses H. Cone Memorial Hospital Operating Corporation d/b/a/ Cone Health ("Cone Health") and Moses Cone Physician Services, Inc. d/b/a Triad Hospitalists ("MCPS") (collectively, "Defendants"² ), seeking to dismiss numerous claims in the Complaint under Federal Rule of Civil Procedure 12(b)(6), as made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012, for failure to state a claim upon which relief can be granted, and (2) the Plaintiff's motion for leave to amend the Complaint. After consideration of the record and for the reasons stated herein, the Court will grant in part and deny in part the Defendants’ motion to dismiss and will grant the Plaintiff's motion for leave to amend.

PROCEDURAL HISTORY

On February 8, 2022, Louis E. Robichaux, IV, in his capacity as the Liquidation Trustee for Randolph Health Liquidation Trust ("Plaintiff"), initiated this adversary proceeding by filing a Complaint against Cone Health, MCPS, and American Healthcare Systems, LLC ("AHS") (Docket No. 1).³ In addition to objecting to certain claims filed or asserted by Cone Health and AHS in the Debtors’ underlying bankruptcy case, the Plaintiff also seeks (1) avoidance of transfers under provisions of the Bankruptcy Code; (2) avoidance of transfers under provisions of the North Carolina Uniform Voidable Transactions Act, N.C. Gen. Stat. § 39-23.1 et seq. ; and damages stemming from (3) breach of contract; (4) breach of the covenant of good faith and fair dealing; (5) breach of fiduciary duty; (6) constructive fraud by a fiduciary; (7) and unfair and deceptive trade practices.

After the Court granted the Defendants an extension of time to answer or otherwise respond to the Complaint, the Defendants filed a motion to dismiss and a supporting brief (Docket Nos. 48, 49, together the "Motion"). The Motion seeks dismissal of the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh, Twelfth, and Thirteenth Causes of Action. The Plaintiff filed an Objection to the Motion (Docket No. 52, the "Objection"), in which he argues against dismissal of the Complaint and, in the event the Motion is granted, requests leave to amend the Complaint. The Court held a hearing on June 30, 2022, at which Jody A. Bedenbaugh and Jason L. Hendren appeared on behalf of the Plaintiff and Thomas W. Waldrep, Jr., and Kelly A. Cameron appeared on behalf of the Defendants. After hearing arguments from each side, the Court took the matter under advisement.

APPLICABLE LEGAL STANDARD

Rule 12(b)(6) of the Federal Rules of Civil Procedure requires dismissal of a complaint if it "fail[s] to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). A motion under Rule 12(b)(6) should be granted as to a particular cause of action if the complaint does not allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The factual allegations must "be enough to raise a right to relief above the speculative level" and nudge the plaintiff's claim "across the line from conceivable to plausible." Id. at 555, 570, 127 S.Ct. 1955. A claim is plausible when the plaintiff "pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Twombly , 550 U.S. at 556, 127 S.Ct. 1955 ).

To determine plausibility, all well-pleaded facts set forth in the complaint are taken as true and viewed in the light most favorable to the plaintiff. Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc. , 591 F.3d 250, 255 (4th Cir. 2009). However, "legal conclusions, elements of a cause of action, and bare assertions devoid of further factual enhancement" will not constitute well-pleaded facts necessary to withstand a motion to dismiss. Id. In other words, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937.

Assuming the complaint meets the plausibility standard, the plaintiff is not required "to also rebut other possible explanations for the conduct alleged." 2 MOORE'S FEDERAL PRACTICE § 12.34(1)(b) (2022); accord Houck v. Substitute Tr. Servs. , 791 F.3d 473, 484 (4th Cir. 2015) (holding that "a plaintiff need not demonstrate ... that alternative explanations are less likely" in order to survive a motion to dismiss). On the other hand, "[d]ismissal under Rule 12(b)(6) is proper if the complaint lacks an allegation regarding an element necessary to obtain relief." 2 MOORE'S FEDERAL PRACTICE § 12.34(4)(a) (2022); see also EEOC v. PBM Graphics Inc. , 877 F. Supp. 2d 334, 343 (M.D.N.C. 2012) (finding a plaintiff must allege facts sufficient to state each element of the claim) (citing Bass v. E.I. DuPont de Nemours & Co. , 324 F.3d 761, 764–65 (4th Cir. 2003) ).

FACTUAL BACKGROUND AND ALLEGATIONS

The following facts are alleged in the Complaint and taken as true for purposes of this Motion:

1. In 2015, after years of struggling, Randolph Health decided that it would need to partner with a larger healthcare system with more capital and began searching for such an organization (Docket No. 1, ¶¶ 18–19). By 2016, Randolph Health was in default of its debt covenants under a term loan with Bank of America ("BOA") (Docket No. 1, ¶ 40).

2. On May 24, 2016, Randolph Health entered into the Management Services Agreement ("MSA") with Cone Health. As part of the MSA, Randolph gave "Cone Health the full power, authority, and responsibility for management of Randolph [Health]" (Docket No. 1, ¶¶ 20–21). The Plaintiff attaches the MSA to the Complaint as Exhibit A.

3. The Complaint alleges Cone Health breached numerous requirements under Section 3 of the MSA (Docket No. 1, ¶ 37), including the following:

a. "Section 3(a): Section 3(a) requires Cone Health to hire, employ, and direct a CEO, COO, and CFO for Randolph Health. Cone Health only partially satisfied this requirement, with CEO Angie Orth being the lone executive provided by Cone Health for a lengthy period of time. When former CEO Skip Marsh left Randolph Health, Cone Health failed to provide a successor CFO, leaving Randolph to rely on its former Controller to take on CFO duties, as well as outside financial advisors. This lack of leadership greatly contributed to deficiencies in Randolph Health's financial accounting department. Further, Section 3(a) requires Cone Health to direct the Key Personnel, but Cone Health did not provide direction to Randolph's CFO and CEO in recent years.

b. "Section 3(b): Cone Health failed to satisfy Section 3(b), which requires Cone Health to provide corporate managerial resources necessary to provide the services under the MSA. Randolph's management has been thinly staffed for years, without adequate resources for a healthcare system of its size. In particular, Cone Health did not provide adequate long-term and strategic planning or adequate managerial resources in connection with Randolph's efforts to find a long-term affiliation transaction.

c. "Section 3(g): Section 3(g) obligates Cone Health to oversee the development of a physician recruitment plan for Randolph. Cone Health did not satisfy this obligation. Cone Health included Randolph in an analysis done by an outside advisor to assess physician and provider needs, but Cone Health never provided any recruitment plan – no assistance or work product was ever provided on how Randolph should utilize its resources and develop a proactive plan to recruit physicians and other providers to meet the identified needs. In short, Cone Health did not provide guidance or assistance on how to fill the gaps. As referenced above, Cone Health actually recruited physician groups away from Randolph, further exacerbating the problem.

d. "Section 3(i): Section 3(i) requires Cone Health provide annual operating budgets, capital expenditures budgets, and cash flow budgets to Randolph for approval by its board. Cone Health did not provide budgets for years" (Docket No. 1, Ex. A, § 3).

4. On February 28, 2017, Cone Health entered into an agreement with Randolph Health and BOA under which Cone Health agreed to make payments to BOA if Randolph Health was unable to do so (Docket No. 1, ¶ 40).

5. On May 23, 2017, Randolph Health also entered into a Professional Services Agreement ("PSA") with Cone Health's affiliate, MCPS (Docket No. 1, ¶ 29). Cone Health also entered into a Letter of Intent ("LOI") with Randolph Health, under which Cone Health began negotiations with Randolph Health to fully integrate it into Cone Health's system, become its sole parent, and assume or guarantee all of Randolph Health's long-term debt (Docket No. 1, ¶ 24). These negotiations with Cone Health were exclusive, and Randolph Health was prohibited from

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