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. Nos. 3:17-cv-399-HEH, 3:17-cv-400-HEH, 3:17-cv-409-HEH
MEMORANDUM OPINION (DENYING MOTIONS TO WITHDRAW THE
E. Hudson United States District Judge
MATTER is before the Court on three Motions 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 decline to exercise its discretion to withdraw the
reference and will deny the Motions.
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: HDL's former directors, officers, and
shareholders; its primary sales agent, a company called Blue
Wave Healthcare Consultants, Inc. ("Blue Wave");
Blue Wave's officers and directors; and, the current
movants, individual independent sales representatives
contracted by Blue Wave ("Movants").
are implicated in eight of the Complaint's counts: Counts
65 and 66, alleging assumpsit and unjust enrichment; Counts
67 and 68, alleging actual and constructive fraud; Counts 69
and 70, alleging tortious interference with contracts and
business expectancies; and Counts 72 and 73, alleging common
law conspiracy and violation of the Virginia Business
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 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.
"cause" is undefined in the statute, courts within
the Fourth Circuit have consistently applied six factors in
determining whether to grant discretionary withdrawal:
"(i) whether the proceeding is core or non-core,
(ii) the uniform administration of bankruptcy proceedings,
(iii) expediting the bankruptcy process and promoting
judicial economy, (iv) the efficient use of debtors' and
creditors' resources, (v) the reduction of forum
shopping, and (vi) the preservation of the right to a jury
trial." In re QSM, LLC, 453 B.R. 807, 809-10
(E.D. Va. 2011); see also In re Peanut Corp. of Am.,
407 B.R. 862, 865 (W.D. Va. 2009); Vieira v. AGM, II,
LLC, 366 B.R. 532, 538 (D.S.C. 2007). No single factor
is dispositive, rather "discretionary withdrawal of
reference should be determined on a case-by-case basis by
weighing all the factors presented in a particular
case." In re U.S. Airways Group, Inc., 296 B.R.
673, 682 (E.D. Va. 2003).
bear the burden of demonstrating that they are entitled to
either mandatory or discretionary withdrawal. Id. at
initial matter, Movants are not entitled to, and they do not
argue for, mandatory withdraw. There is no dispute that the
eight claims that Plaintiff raises against Movants are
state-law causes of action. Thus, resolution of these claims
does not require the Court to consider "laws of the
United States regulating organizations or activities
affecting interstate commerce" necessitating ...