United States District Court, E.D. Virginia, Richmond Division
In re HEALTH DIAGNOSTIC LABORATORY, INC., et al, Debtors.
LATONYA S. MALLORY, et al, Defendants. RICHARD ARROWSMITH, LIQUIDATING TRUSTEE OF THE HDL LIQUIDATING TRUST, Plaintiff, Bankr. Ct. Adv. Proc. No. 16-3271-KRH Dist. Ct. No. 3:17-cv-413-HEH
MEMORANDUM OPINION (DENYING MOTION TO WITHDRAW THE
E. Hudson United States District Judge
MATTER is before the Court on a Motion to Withdraw the
Reference of this adversarial proceeding from the United
States Bankruptcy Court for the Eastern District of Virginia
("Bankruptcy Court") to the District
Court. For the reasons that follow, the Court
will deny the Motion. payments made by HDL to Blue
(collectively "Movants"). HDL's former
directors, officers, and shareholders are also named as
defendants but are not seeking to withdraw the
counts of the Complaint implicate some or all of the
Movants.Twenty-eight of Plaintiffs claims against
Movants seek to avoid HDL's fraudulent transfers of
payments and obligations pursuant to Title 11 of the United
States Code ("Bankruptcy Code"). The other counts
include various statutory and common law causes of action
such as fraud, conspiracy, and tortious interference with
contracts and business expectancies.
now seek to withdraw the reference and have this adversarial
action-at least as it applies to them-litigated in the
District Court rather than the Bankruptcy Court.
district courts have original jurisdiction over all
bankruptcy matters. 28 U.S.C. § 1334. However, Congress
has provided that a district court may refer its bankruptcy
proceedings to a bankruptcy judge for adjudication. 28 U.S.C.
§ 157(a). Accordingly, by standing order issued on
August 15, 1984, this Court automatically
Diagnostic Laboratory, Inc. ("HDL"), based in
Richmond, Virginia, was a provider of specialized laboratory
services to physicians and other healthcare providers
throughout the United States. HDL and its affiliate companies
(collectively "Debtors") filed for Chapter 11
bankruptcy in the Bankruptcy Court in June 2015. In May 2016,
the Bankruptcy Court approved the Debtors' Second Amended
Plan of Liquidation and appointed Plaintiff Richard
Arrowsmith ("Plaintiff) as trustee of the liquidating
September 16, 2016, Plaintiff initiated this adversarial
proceeding by filing a seventy-six count Complaint. The
Complaint asserts that HDL and its business partners
conspired to pursue a fraudulent and illegal business model.
They allegedly paid illegal kickbacks to incentivize doctors
to use HDL's services, unlawfully refused to accept
copays to incentivize patients to agree to expensive and
unnecessary laboratory tests, and paid unlawful sales
commissions to third-party sales agents.
Complaint names as defendants all of the participants in the
alleged conspiracy. Those defendants include the current
Movants: Floyd Calhoun Dent, III, and Robert Bradford
Johnson; their company, Blue Wave Healthcare Consultants,
Inc. ("BlueWave"), which served as HDL's
primary sales agent; and various entities controlled by Dent,
Johnson, or their family members, which were transferees of
Blue Medical Inc., Aroc Enterprises LLC, Riverland Pines LLC,
Crosspoint Properties LLC, Helm-Station Investments LLLP, and
Trini "D" Island LLC. refers all bankruptcy matters
to the Bankruptcy Court. But the Bankruptcy Court's
jurisdiction is limited. Thus, in certain situations a
case's reference to the Bankruptcy Court may or must be
withdrawn back to the District Court.
district court must withdraw the reference where the
"resolution of the proceeding requires consideration of
both title 11 and other laws of the United States regulating
organizations or activities affecting interstate
commerce." 28 U.S.C. § 157(d). In all other
situations, withdrawal of the reference is discretionary and
is permitted "for cause shown." Id.
Movants bear the burden of demonstrating that they are
entitled to either mandatory or discretionary withdrawal.
In re U.S. Airways Group, Inc., 296 B.R. 673, 677
case, Movants argue that some of the claims against them
require mandatory withdrawal. They also contend that cause
exists for the Court to grant discretionary withdrawal as to
all the claims they face. However, the Court finds
Movants' arguments unavailing and will deny their Motion
in its entirety.
withdrawal is mandatory when the Court must consider both
bankruptcy law and "other laws of the United States,
" the Fourth Circuit has never addressed how that
language should be applied. A majority of courts have
determined "that § 157(d)'s [mandatory
withdrawal] clause applies only when a proceeding requires
'substantial and material' consideration of
non-bankruptcy federal law." Eli Glob., LLC v. Univ.
Directories, LLC,532 B.R. 249, 251 (M.D. N.C. 2015)
(internal citations omitted). This Court reached a similar
conclusion in U.S. Airways Group, holding that
"an issue or question of non-bankruptcy federal law ...