Smith v. Terry (In re Salubrio, LLC)
| Docket Number | 20-50578-RBK,Bankruptcy SA-21-CV-0476-JKP |
| Decision Date | 05 August 2022 |
| Parties | IN RE SALUBRIO, LLC, Debtor. v. ERIC B. TERRY, Trustee, Salubrio LLC., Appellee. DOUGLAS K. SMITH, MD, Appellant, |
| Court | U.S. District Court — Western District of Texas |
(Appeal from Order in Bankruptcy Case No. 20-50578-RBK)
Before the Court is an appeal from an order in Bankruptcy Case No 20-bk-50578-RBK. Pursuant to 28 U.S.C. § 158(a) Appellant Douglas K. Smith, MD, (“Dr. Smith” or “Appellant”) appeals an order of the Bankruptcy Court issued on May 3, 2021, after a hearing. Appellant proceeds pro se in this appeal and is an interested party of the corporate debtor in the underlying bankruptcy action. In the appealed order, the Bankruptcy Court authorized the Chapter 7 Trustee for the Debtor to abandon the estate's interest in physical and locally stored electronic records. Eric B. Terry is the Chapter 7 Trustee and the Appellee in this appeal.
On June 21, 2021, the Bankruptcy Court certified that Appellant's designation of the record on appeal (“ROA”) is complete and transmitted designated items. See ECF No. 2. That same date, Appellant filed his appellate brief. See ECF No. 3. Two days later, the Bankruptcy Court certified that Appellee's designation of additional items to include in the ROA is complete and transmitted those designated items. See ECF No. 5. Appellee has filed his brief (ECF No. 7) and Appellant has filed his reply brief (ECF No. 8). In two later filings, docketed as Advisories to the Court, Appellant has submitted a transcript of the motion hearing (ECF No. 9) and an amended appellate brief with proper format (ECF No. 10).[1] The appeal is ready for ruling.
Having considered the issues raised in this appeal to the extent necessary, the arguments of the parties, the relevant portions of the record, and the applicable principles of law, the Court finds no need for oral argument and, for the reasons that follow, it dismisses this appeal for Appellant's lack of bankruptcy standing.
On March 11, 2020, Salubrio, LLC (“Salubrio”), the debtor in the underlying bankruptcy action, filed a voluntary petition for relief under Chapter 11, Subchapter V, of the Bankruptcy Code. See Bankruptcy Docket Sheet (ECF No. 2-3) at 2. During the Subchapter V proceedings, the Bankruptcy Court appointed Mr. Terry as Trustee and he continued in that capacity after the matter was converted to Chapter 7. See R.[2] at 4 nn. 1-2.
Pursuant to 11 U.S.C. §§ 1107(a) and 1108, the Debtor initially operated its business and managed its property as a debtor-in-possession. On June 10, 2020, the Bankruptcy Court granted a motion to remove the debtor in possession. See ECF No. 2-3 at 22 (). On September 23, 2020, the Bankruptcy Court converted the Chapter 11 bankruptcy to Chapter 7 and removed Mr. Terry as Chapter 11 Trustee. See id. at 42 (D.E. 261).
Salubrio is a single member limited liability company (“LLC”) owned by Dr. Smith which is located on Basse Road in San Antonio, Texas. R. at 68. It provided “Diagnostic MRI services for personal injury evaluations.” R. at 64. As part of its bankruptcy, Salubrio filed the following forms:
As President of the Debtor, Dr. Smith signed these forms (other than the summary and disclosure of compensation) under penalty of perjury. See R. at 55, 70.
According to Schedule A/B, the Debtor's assets primarily consisted of accounts receivable. See R. at 30-36. But the assets also included cash or cash equivalents; minimal computer and office equipment valued at $1,500.00; and a sublease valued at $1.00. See R. at 30, 33-34, 36. And, as found by the Bankruptcy Court, the Debtor's property also included billing and other pertinent medical records of its patients (“Patient Records”) that warranted a qualified protective order to ensure compliance with applicable laws. See R. at 4-5. The Bankruptcy Court approved certain recipients “to use, disclose, and receive Patient Records,” including the Trustee, his attorneys, and other consultants, professionals, and third parties engaged by the Trustee. See R. at 5-6.
Although numerous creditors are listed on the filed schedules, the official forms do not list Dr. Smith as a creditor. See R. 29-72. Instead, he has acted as the Debtor's corporate representative. See R. 55, 70. He also controls various non-debtor entities, including Musculoskeletal Imaging Consultants, LLC (“MSKIC”) and Complete Radiology Management Solutions, LLC (“CRMS”). See R. 197-99 ().
On April 21, 2021, the Trustee filed a motion, hereinafter referred to as Motion to Abandon, that led to the appeal now before the Court. See R. 8-18 (). On that same date, he filed a motion to expedite consideration. See R. 19-24 (). The next day, he emailed notice of an expedited hearing on the motion to Dr. Smith. See Supp. R. 4-5.
On April 23, 2021, Dr. Smith, as a party-in-interest, filed partial objections to the Motion to Abandon. See id. at 7-17 (entirety of objections). Within the objections, he described himself as “Owner” or “Trust Settlor.” See, e.g., id. at 8. As one reason for objecting, he argued that the “Trustee and his professionals should be estopped from now asserting control over the personal property of the licensed physician, Dr. Smith.” Id. at 9. He contended “that medical records documenting medical care performed under his medical license are his personal property under Texas state laws and Trustee has no ownership claim to Dr. Smith's personal property.” Id. While objecting to certain matters, Dr. Smith stated that he “has no objection to Trustee abandoning all Debtor interest in property at Basse location.” Id. at 12. Thus, although he asked the Bankruptcy Court to deny some requested relief, he also requested that the court grant the Motion to Abandon “any estate property that may exist at Basse location.” Id. at 15.
Dr. Smith objected to what he contended was the Trustee's improper attempt to seize third party property for which the Trustee allegedly had not proven to be property of the Debtor's estate. Id. at 13. He described the third-party property as items including but not limited to “Trade Secrets of separate legal entities including MSKIC and CRMS that are protected by Defend Trade Secrets Act of 2016.” Id. Further, based on his contention that he owned “all medical records performed under his license,” he objected to the Trustee's requested relief to remove, scan, and then store physical records if he refused to retrieve or arrange for the records to be delivered after written notice. Id. In addition, he objected to the copying and wiping of all locally stored electronic data on any computer drives and MRI machines located on the premises. Id.
On April 29, 2021, the Bankruptcy Court held a telephonic hearing on the Motion to Abandon. See Tr. Mot. H'rg of Apr. 29, 2021, (ECF No. 5-3) (hereinafter Tr.) at 3-59. Dr. Smith continued to object to abandoning property owned by separate legal entities, see id. at 21, 27-30, 36, 4344, 47, 50-51, 58, and himself, see id. at 30-31, 36, 44. The Trustee contended that, due to “the way that Dr. Smith ran Salubrio and the non-debtor entities, information had been comingled and the system set-up has caused confusion. Id. at 24-25. The Bankruptcy Court stated that, in its view, there is no question “that the information is something that's essential to the estate” and that Salubrio owns the information. Id. at 45. It recognized that “MSKIC or CRMS may own the computers” and other physical office equipment, but the information within any such items is necessary “to liquidate the assets of this estate.” Id. at 45-46. It specifically found that the information is “property of the estate.” Id. at 57. It found that for the Trustee “to do his job and liquidate the assets of the estate, he's got to have the information in order to prove these claims against the personal-injury claimants and their law firms.” Id. at 52-53. It found that the information may be copied in a confidential manner and then notice can be given “to MSKIC and CRMS” and “the computers will be delivered to those entities wherever they specify.” Id. at 53. It also stated:
The issue today is copying and then basically abandonment of these electronic records. And I'm saying that they can copy them because they've got to have access to the information, and then they can abandon them to CRMS, MSKIC, or whoever is the lawful owner of the hardware, obviously, with protections where the hardware needs to be protected against disclosure of confidential information. But if MSKIC and CRMS want to keep the information on the hardware, I guess they can do that. They're the owners of the hardware, apparently.
Id. at 54. The Bankruptcy Court also indicated that Dr. Smith could have “the...
To continue reading
Request your trial