Arrowsmith v. Lemberg Law, LLC (In re Health Diagnostics Laboratory, Inc.)

571 B.R. 182
CourtUnited States Bankruptcy Court, E.D. Virginia
DecidedMarch 30, 2017
DocketCase No. 15-32919-KRH; APN No. 16-03252
StatusPublished
Cited by9 cases

This text of 571 B.R. 182 (Arrowsmith v. Lemberg Law, LLC (In re Health Diagnostics Laboratory, Inc.)) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, E.D. Virginia primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Arrowsmith v. Lemberg Law, LLC (In re Health Diagnostics Laboratory, Inc.), 571 B.R. 182 (Va. 2017).

Opinion

MEMORANDUM OPINION

Kevin R. Huennekens, UNITED STATES BANKRUPTCY JUDGE

Before the Court in this adversary proceeding is a motion to dismiss filed by Lemberg Law, LLC (“Lemberg Law”) and the Consumers1 (collectively, the “Defendants”) under Bankruptcy Rule 7012 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rule(s)”), which incorporates Civil Rule 12(b)(6) of the Federal Rules of Civil Procedure (the “Civil Rule(s)”), for to failure to state a claim upon which relief can be granted (the “Motion to Dismiss”). The Motion to Dismiss seeks an order from this Court to dismiss the Verified Complaint (the “Complaint”) [187]*187of Richard Arrowsmith, in his capacity as Liquidating Trustee of the HDL Liquidating Trust (the “Liquidating Trustee” or “Plaintiff’).2 The issue before the Court is whether the Liquidating Trustee’s Complaint pleads sufficient facts to present plausible causes of action to survive the Motion to Dismiss. A hearing on the Motion to Dismiss was held on October 20, 2016 (the “Hearing”). At the Hearing, the Court took the Motion to Dismiss under advisement. For the reasons set forth in this Memorandum Opinion, the Court denies the Motion to Dismiss.

Procedural Facts

On June 7, 2015 (the “Petition Date”), the Debtors commenced these bankruptcy Cases by each filing separate voluntary petitions for relief under chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”)3 in the United States Bankruptcy Court for the Eastern District of Virginia (the “Court”). After the Petition Date, the Debtors continued to operate and manage their properties as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. On June 9, 2015, the Court entered an order authorizing the joint administration of the chapter 11 Cases. On June 16, 2015, the United States Trustee for the Eastern District of Virginia appointed a statutory committee of unsecured creditors (the “Committee”).4 The Court confirmed the Debtors’ Modified Second Amended Plan of Liquidation (the “Plan”) by order entered May 12, 2016 (the “Confirmation Order”).5 The HDL Liquidating Trust was formed in accordance with the terms of the Plan on the Effective Date.6 Pursuant to the Plan and 11 U.S.C. § 1123, the Liquidating Trustee is the successors of the Debtors and the Committee.

On September 17, 2015, the Court entered an Order (I) Approving Asset Purchase Agreement and Authorizing the Sale of Assets of the Debtors Outside the Ordinary Course of Business, (II) Authorizing the Sale of Assets Free and Clear of All Liens, Claims, Encumbrances and Interest, (III) Authorizing the Assumption and Sale and Assignment of Certain Executo-ry Contracts and Unexpired Leases and (IV) Granting Related Relief (the “Sale Order”) which approved the Debtors’ sale of substantially all of their assets to True Health Diagnostics, LLC (“True Health”) under the terms of an Asset Purchase Agreement (“APA”). The sale under the APA closed on September 29, 2015 (the “Closing Date”). Pursuant to the APA, the Debtors retained ownership of accounts receivable aged 180 days or more as of the Closing Date (the “Excluded Receivables”).

HDL operated an accredited, full service clinical laboratory that provided testing of [188]*188biomarkers for the indication of risk for cardiovascular disease, diabetes, and other illnesses. HDL’s testing services offered physicians the ability to detect major health issues in patients before potentially life-threatening events occurred. HDL processed lab tests it received from physicians all around the country. The Excluded Receivables include amounts owed to HDL by patients for laboratory testing (the “Excluded Patient Receivables”). The Excluded Patient Receivables are classified by the Liquidating Trustee as: (1) receivables due from patients who received monies in the form of reimbursement from their insurance carriers (the “Paid to Patient Receivables”); (2) receivables due from patients who are solely responsible to pay for laboratory testing they received from HDL; (3) receivables due from patients who are responsible to pay for laboratory testing because they have not yet met their insurance deductibles; and (4) receivables that are due on account of insurance carrier denials.

On or about July 28, 2015, the Liquidating Trustee entered into collection agreements with Monterey Financial Services, LLC, d/b/a Monterey Collections (“Monterey”) and other collection agents (collectively, the “Collectors”) to pursue collection of certain Excluded Patient Receivables owned by HDL (the “Collection Agreements”). Since HDL engaged the Collectors, the Collectors have transmitted notices to certain patients for whom HDL had performed laboratory testing.

In January 2015, True Health sent cease and desist letters to HDL requesting HDL and related parties to stop collecting the Excluded Patient Receivables. The Liquidating Trustee responded by filing an adversary proceeding7 against True Health and Jeffrey P. “Boomer” Cornwell (collectively, the “True Health Defendants”) and sought an injunction prohibiting the True Health Defendants from interfering with the efforts of the Liquidating Trustee and the Collectors to collect the Excluded Patient Receivables. On February 6 and 12, 2016, the Court entered injunction orders (the “Injunction Orders”) enjoining the True Health Defendants from taking any actions to interfere with HDL’s collection of the Excluded Patient Receivables. In the Injunction Orders, the Court held that interference with the efforts of the bankruptcy estate to collect the Excluded Receivables constituted willful violations of section 362(a)(3) of the Bankruptcy Code. No party appealed the Injunction Orders.

Nevertheless, the Liquidating Trustee continued to experience difficulties collecting the Excluded Receivables even after the Injunction Orders had been entered. On June 3, 2016, the Liquidating Trustee filed in the Debtors’ bankruptcy Cases a Motion to (A) Enforce the Automatic Stay to Certain Accounts Receivable Constituting Property of the Estate; (B) Extending the Automatic Stay to Collection Entities Acting at the Aid and Direction of the Liquidating Trustee for Purposes of Collecting Such Property for the Benefit of Creditors; and (C) Granting Related Relief under 11 U.S.C. § 105 (the “Motion to Enforce and Extend”). Lemberg Law filed an objection to the Motion to Enforce and Extend and appeared at a hearing conducted on June 6, 2016. The Court approved the Motion to Enforce and Extend over the objection of Lemberg Law, but stated that the order would not prejudice any party’s ability to “file a motion for relief from the automatic stay” or “file a complaint in this Court” in the event of a [189]*189“violation of the Fair [Debt] Collection Practices Act.” On July 1, 2016, the Court entered the

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Bluebook (online)
571 B.R. 182, Counsel Stack Legal Research, https://law.counselstack.com/opinion/arrowsmith-v-lemberg-law-llc-in-re-health-diagnostics-laboratory-inc-vaeb-2017.