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Lemberg Law, LLC v. Arrowsmith

United States District Court, E.D. Virginia, Richmond Division

February 8, 2017

LEMBERG LAW, LLC, et al., Appellants,
RICHARD ARROWSMITH, Liquidating Trustee of the HDL Liquidating Trust, Appellee.



         Preliminary injunctions are extraordinary remedies designed to prevent irreparable harm from occurring while cases progress through the typical stages of litigation. See Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20, 24 (2008). Based on this extraordinary nature, the Federal Rules of Civil Procedure set forth very specific procedures on how courts must evaluate and issue preliminary injunctions. In this case, the United States Bankruptcy Court for the Eastern District of Virginia, Richmond Division (the "Bankruptcy Court"), issued a preliminary injunction. The Bankruptcy Court, however, did not follow the required rules. Specifically, the Bankruptcy Court did not make findings as required by Rule 52, and did not describe the proscribed conduct in reasonable detail as required by Rule 65. In doing so, the Bankruptcy Court abused its discretion. Accordingly, this Court must vacate the preliminary injunction.

         I. BACKGROUND

         Health Diagnostic Laboratory ("HDL") filed for bankruptcy in June 2015. In September 2015, the Bankruptcy Court approved a sale of substantially all of HDL's assets, but HDL retained accounts receivable aged 180 days or more (the "Excluded Receivables"). In May 2016, the Bankruptcy Court confirmed HDL's liquidation plan, through which its assets passed to Richard Arrowsmith, the Liquidating Trustee of the HDL Liquidating Trust (the "Liquidating Trustee").

         The Liquidating Trustee hired three outside debt collectors to pursue collection on the Excluded Receivables.[1] Some consumers who received debt collections letters sought help from their healthcare provider, who sent a letter to consumers encouraging them to dispute the debt. Other consumers hired lawyers, who challenged the collections as violations of the Fair Debt Collection Practices Act.

         On August 3, 2016, the Liquidating Trustee initiated an adversary proceeding against multiple defendants, including some consumers, their lawyers, and a healthcare provider.[2] The complaint included seven causes of action, all related to the defendants' attempts to interfere with collection of the Excluded Receivables. The same day, the Liquidating Trustee filed a motion for preliminary injunction.

         On August 18, 2016, the Bankruptcy Court held a hearing on the preliminary injunction motion. After hearing argument from each side, the Bankruptcy Court granted the motion. It did not make any findings of fact, discuss the legal standard for granting preliminary injunctions, or state its conclusions (e.g., on which claim the Liquidating Trustees would likely succeed on the merits). The Bankruptcy Court did, however, instruct the Liquidating Trustee to add language to the draft order about not infringing on the defendants' constitutional rights. (See Appellee's App. 196-97, 41:22-42:4.)

         On August 30, 2016, the Bankruptcy Court entered the order granting a preliminary injunction (the "Preliminary Injunction Order"). In the Preliminary Injunction Order, the Bankruptcy Court made preliminary findings about its jurisdiction and appropriate notice. Additionally, the Bankruptcy Court found that (1) "the relief request[ed] in the Motion is in the best interest of the . . . [Liquidating Trustee], the estate and creditors thereof, " (2) "the estate stands to suffer irreparable harm if it is not granted an order to maintain the status quo ante pending this Court's ruling on the merits of the Complaint, " and (3) "upon the record herein, and after due deliberation thereon, good and sufficient cause exists for the granting of the relief as set forth in the Preliminary Injunction Order. (Appellants' App. 136-37.)

         Pertinent to this appeal, the Preliminary Injunction Order ordered:

THAT the Defendants shall be preliminarily enjoined from taking any action adverse to the Liquidating Trustee, the Collectors, or any other professionals or agents acting at the direction of the Liquidating Trustee to collect or administer the Excluded Receivables for the benefit of the estate ...
THAT the Defendants shall be preliminarily enjoined from contacting physicians, groups of physicians, related entities, patients, or any other persons or entities concerning the Excluded Receivables...
THAT nothing contained in this Order shall be construed to impair any of the Defendants' First Amendment, Fifth Amendment, or other Constitutional rights. In addition, in accordance with the federal rules of bankruptcy procedure and the local rules of this Court, each of the Defendants shall be entitled to file pleadings and motions they deem appropriate in connection with and related to the relief sought in the Complaint

(Appellants' App. 137-38.) Lemberg Law and the ...

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