In re Health Diagnostic Laboratory, Inc.

551 B.R. 218, 2016 Bankr. LEXIS 1988, 2016 WL 2772591
CourtUnited States Bankruptcy Court, E.D. Virginia
DecidedMay 12, 2016
DocketCase No. 15-32919
StatusPublished
Cited by9 cases

This text of 551 B.R. 218 (In re Health Diagnostic 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
In re Health Diagnostic Laboratory, Inc., 551 B.R. 218, 2016 Bankr. LEXIS 1988, 2016 WL 2772591 (Va. 2016).

Opinion

MEMORANDUM OPINION

Kevin R. Huennekens, UNITED STATES BANKRUPTCY JUDGE

On June 7, 2015 (the “Petition Date”), Health Diagnostic Laboratory, Inc. (“HDL”) and two of its subsidiaries (the “Debtors”)1 commenced these bankruptcy cases by filing separate voluntary petitions for relief under chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”)2 in the United States Bankruptcy [221]*221Court for the Eastern District of Virginia (the “Court”). Throughout the case, the Debtors have continued to manage their properties and operate their businesses as debtors in possession pursuant to §§ 1107 and 1108 of the Bankruptcy Code. No trustee or examiner has been appointed in these chapter 11 cases. On June 9, 2015, the Court entered an order authorizing the joint administration of these chapter 11 cases. On June 16, 2015, the United States Trustee for the Eastern District of Virginia appointed the statutory committee of unsecured creditors (the “Committee”).3

Now before the Court is the Debtors’ Modified Second Amended Plan of Liquidation (the “Liquidating Plan”). On March 29, 2016, the Court conducted a hearing (the “Confirmation Hearing”) to consider confirmation of the Debtors’ Liquidating Plan. At issue were three objections (the “Objections”) filed by (i) Russell Warnick (“Warnick”); (ii) BlueWave Health Care Consultants, Inc. (“Blue-Wave”); and (iii) Dennis Ryan (“Ryan”). At the conclusion of the Confirmation Hearing, the Court announced that it would overrule the Objections and approve the Liquidating Plan. This Memorandum Opinion sets forth the Court’s findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure.4

Jurisdiction and Venue

The Court has subject matter jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157 and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L). Venue is appropriate in this Court pursuant to 28 U.S.C. § 1408.

Factual Background

HDL was a privately held company with its headquarters in Richmond, Virginia. As of the Petition Date, HDL was governed by a fívé member Board of Directors (the “Board”).5 HDL operated an accredited, full service clinical laboratory that provided testing of biomarkers 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. Under HDL’s pre-petition business model, physicians would send biological samples to HDL and ask that HDL perform certain tests on the samples. HDL would, in most cases, bill the patient’s private insurance company or the public Medicare and Medicaid programs for the testing services it provided. HDL would then reimburse the referring physicians for the cost of collecting, processing, and handling the blood samples that they had sent to HDL for testing. HDL employed BlueWave as its outside sales contractor to market HDL’s testing services. The Debtors experienced a meteoric rise from a startup company in 2009 to a company with $375 million in net revenue and [222]*222EBITDA6 of $45.2 million for the fiscal year ending December 31,2013.

In 2013, the Department of Justice (the “DOJ”) began investigating the Debtors and BlueWave in connection with HDL’s business practices including its payment of process and handling fees to the referring physicians. The Debtors’ fortunes began to decline precipitously after the Office of the Inspector General for the Department of Health and Human Services issued a special fraud alert on June 25, 2014 (the “Special Fraud Alert”). The Special Fraud Alert concluded that the payment of processing and handling fees to referring physicians could violate certain federal anti-kickback laws. HDL thereafter ceased paying process and handling fees to physicians. As a result, its net revenues in the third and fourth quarter of 2014 declined by more than 47%. A number of lawsuits and a string of bad publicity ensued that put considerable liquidity pressure on the Debtors. On October 15, 2014, Cigna filed a complaint against HDL in the United States District Court for the District of Connecticut, seeking $84 million in damages (the “Cigna Action”).7 On April 10, 2015, Aetna filed a complaint against several defendants including HDL, BlueWave, and LaTonya Mallory (“Mallory”), the Debtors’ former CEO,8 in the United States District Court for the Eastern District of Pennsylvania (the “Aetna Action”).9

On April 9, 2015, the DOJ announced a settlement with HDL whereby HDL agreed to pay $47 million to settle all the government claims against it in connection with the referral fees.10 By this time, HDL’s relationship with its pre-petition secured lender, Branch Banking and Trust Company (“BB & T”), had deteriorated badly.11 Following a series of defaults under its BB & T loan facilities, BB & T discontinued HDL’s borrowing ability and cut off HDL’s access' to its existing accounts. With no ability to access its cash and with no alternative sources of financing immediately available, HDL was forced to file for protection under chapter 11 of the Bankruptcy Code.

Chapter 11 Case

The Debtors engaged Alvarez & Marsal Healthcare Industry Group, LLC (“A & M”) to assist with the restructuring efforts [223]*223and to help maximize the value of the Debtors’ bankruptcy estates. A & M provided the Debtors with a chief restructuring officer (“CRO”) and additional support personnel. Richard Arrowsmith (“Arrows-mith”) assumed the CRO position effective September 21, 2015.

BB & T declined to provide post-petition financing to the Debtors following the Petition Date.12 The Debtors were thereby forced to rely solely on cash flow to fund their day-to-day operations. Despite its unwillingness to lend to the Debtors, BB & T initially consented to the use of its cash collateral so that the Debtors could keep their business afloat. At a hearing to consider the continued use of cash collateral on July 30, 2015, BB & T informed the Debtors that it would not consent to the Debtors’ use of cash collateral beyond August 4,2015.

, Faced with the deadline imposed by BB & T, on August 2, 2015, the Debtors filed a motion to approve a post-petition secured, super-priority financing facility from an outside lender (the “Post-petition DIP Financing”).

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Cite This Page — Counsel Stack

Bluebook (online)
551 B.R. 218, 2016 Bankr. LEXIS 1988, 2016 WL 2772591, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-health-diagnostic-laboratory-inc-vaeb-2016.