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Warnick v. Arrowsmth

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

July 14, 2017

G. RUSSELL WARNICK, and LATONYA S. MALLORY Appellants,
v.
RICHARD ARROWSMTH, AS LIQUIDATING TRUSTEE OF THE HDL LIQUIDATING TRUST, Appellee, LECLAIRRYAN, A PROFESSIONAL CORPORATION, Intervenor-Appellee.

          OPINION

          John A Gibney, Jr. United States District Judge.

         Health Diagnostic Laboratory, Inc., ("HDL") declared Chapter 11 bankruptcy after the Department of Justice found a number of its business practices illegal. According to the Department of Justice, HDL gave illegal kickbacks to health care providers who sent it lab work. HDL paid fines as a result of the Justice Department investigation, and these legal troubles triggered the company's downfall.

         HDL claimed that its long-time counsel, LeClairRyan, P.C., had committed malpractice by telling HDL that the kickbacks were legal. Richard Arrowsmith, HDL's trustee in bankruptcy, agreed to a settlement with LeClairRyan for more than $20 million to resolve the malpractice claim (the "Settlement"). The Bankruptcy Court for the Eastern District of Virginia found the Settlement reasonable and approved it in an order dated October 14, 2016 (the "Approval Order").

         Russell Warnick and LaTonya Mallory, former HDL executives and appellants here, have objected to the approval of the Settlement. Essentially, Warnick and Mallory think that the Approval Order releases LeClairRyan from claims that Warnick and Mallory may want to assert against LeClair in future litigation. The Bankruptcy Court clarified in a memorandum opinion (the "Approval Opinion") that the viability of Warnick and Mallory's personal claims against LeClairRyan would have to be decided in future litigation by whatever court entertained the future case. Warnick and Mallory, however, argue that the Approval Order says something different. They also contend that the Bankruptcy Court erred in maintaining jurisdiction over disputes arising from the HDL bankruptcy.

         Warnick and Mallory also argue that the Bankruptcy Court erred by refusing to admit into evidence the demand letter (the "Demand Letter") that Arrowsmith sent to LeClairRyan to begin settlement negotiations. The Bankruptcy Court characterized the letter as inadmissible settlement material, sealed it from public view, and did not admit it into evidence.

In these appeals, Warnick and Mallory ask this Court to reverse and vacate the Approval Order. Warnick also seeks reversal of the Bankruptcy Court's decision to exclude the Demand Letter from evidence, although he does not object to its admission under seal. Arrowsmith has moved to dismiss the appeals on mootness and standing grounds.

         The Court denies the trustee's motion to dismiss because the appellants have standing to bring their claims, and the appeals are not equitably moot.

         The Court affirms the Bankruptcy Court's approval of the Settlement, because the Settlement and Approval Order do not decide any future legal claims of the appellants. Lest any doubt remain about the effect of the Approval Order, the Court's Order in this case will clarify these matters. The Court also affirms the decision of the Bankruptcy Court to maintain future jurisdiction over disputes arising from the Settlement.

         Finally, the Court will affirm the Bankruptcy Court's decision to exclude the Demand Letter from evidence. The Demand Letter should be part of the record on appeal and will not be held under seal.

         I. BACKGROUND

         According to Arrowsmith, LeClairRyan told HDL that it could legally make certain payments to health care providers who sent lab work to HDL. The Department of Justice thought the payments amounted to illegal kickbacks, and it sought fines and penalties from HDL. HDL paid $47 million to the DOJ to resolve the charges, which put HDL on the road to Chapter 11 bankruptcy. In May 2016, the Bankruptcy Court approved a liquidation plan (the "Liquidation Plan"), with Arrowsmith as the liquidating trustee. In October 2016, Arrowsmith sent the Demand Letter to LeClairRyan seeking $250 million in damages, which the parties settled for over $20 million.

         Warnick and Mallory, former executives of HDL, objected to the Settlement on a number of grounds. Relevant here, they argued that the Settlement (1) interfered with their rights to bring a direct claim against LeClairRyan for legal advice given to them in their individual capacities, (2) pre-adjudicated the applicability of a Virginia statute barring contribution claims by the appellants against LeClairRyan for any future liabilities for which the appellants and LeClairRyan are found jointly liable, and (3) improperly maintained continuing jurisdiction over the Settlement. The Bankruptcy Court approved the Settlement over these objections and entered its Approval Order and Approval Opinion.

         II. DISCUSSION

         A. Motion to Dismiss

         Arrowsmith has moved to dismiss the appeals on grounds that the appellants lack standing and that the appeals are equitably moot. The Court denies the motion to dismiss.

         i. Standing

         To have standing in a bankruptcy appeal, "the appellant [must] show that he has been directly and adversely affected pecuniarily by the bankruptcy order." In re Urban Broad. Corp., 401 F.3d 236, 243 (4th Cir. 2005). An appellant must have '"a direct and substantial interest in the question being appealed?" In re Westwood Cmty. Two Ass'n, Inc., 293 F.3d 1332, 1335 (11th Cir. 2002) (emphasis added) (quoting In re Odom, 702 F.2d 962, 963 (11th Cir. 1983)). The question on appeal deals with the viability of claims the appellants may assert in the future; Mallory and Warnick each have a direct financial interest in the questions at issue on appeal and therefore have standing.

         ii. ...


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