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In re Health Diagnostic Laboratory, Inc.

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

July 19, 2017

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


          Henry E. Hudson United States District Judge

         THIS 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.[1] For the reasons that follow, the Court will deny the Motion. payments made by HDL to Blue Wave[2] (collectively "Movants"). HDL's former directors, officers, and shareholders are also named as defendants but are not seeking to withdraw the reference.[3]

         Forty-four counts of the Complaint implicate some or all of the Movants.[4]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.

         Movants 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.


         Federal 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

         I. BACKGROUND

         Health 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 trust.

         On 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.

         The 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.

         A 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 (E.D.Va. 2003).

         In this 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.

         a. Mandatory Withdrawal

         While 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 ...

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