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In re Health Diagnostic Laboratory, Inc.

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

July 19, 2017

In re HEALTH DIAGNOSTIC LABORATORY, INC., et al., Debtors.
v.
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 REFERENCE)

          Henry E. Hudson United States District Judge

         THIS 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.[1] For the reasons that follow, the Court will decline to exercise its discretion to withdraw the reference and will deny the Motions.

         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: 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").[2]

         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 Conspiracy Act.

         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.

         II. DISCUSSION

         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 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.

         While "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, [3] (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).

         Movants bear the burden of demonstrating that they are entitled to either mandatory or discretionary withdrawal. Id. at 677.

         As an 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 ...


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