United States Ex Rel. Rahman v. Colkitt

61 F. App'x 860

• Court: Court of Appeals for the Fourth Circuit
• Decided: April 2, 2003
• Docket: 01-2386, 01-2389, 01-2387, 01-2388
• Status: Unpublished

Opinion

Affirmed by unpublished PER CURIAM opinion.

OPINION

PER CURIAM.

In this appeal, DVI Financial Services, Inc. challenges the district court’s approval of a complex “global” settlement of several related cases, essentially contending that the global settlement agreement failed to recognize DVI’s security interests in assets that were disposed of by the agreement.

The cases covered by the global settlement agreement arose from claims that Dr. Douglas Colkitt, Dr. Jerome Derdel, Colkitt’s wife, and more than 80 healthcare entities (cancer centers and affiliated corporations) owned, operated, or controlled by Colkitt engaged in a fraudulent billing scheme, causing losses to the federal Medicare and CHAMPUS programs in excess of $12 million. Drs. Colkitt and Derdel were physicians specializing in radiation oncology.

In one action involved in the settlement, the United States prosecuted claims against Colkitt, his partners, and his businesses, demanding $86 million in treble damages and penalties.

The principal business through which Colkitt operated, EquiMed, Inc., was involuntarily placed into bankruptcy by its creditors, and a trustee was appointed. The trustee commenced an adversary action against many of the defendants named by the United States in its action, seeking to recover for the EquiMed estate losses that were allegedly caused by fraud, breach of contract, and other similar conduct.

Following EquiMed’s bankruptcy, three subsidiaries of EquiMed filed voluntary Chapter 11 proceedings, and those proceedings were consolidated with the EquiMed bankruptcy.

Contemporaneous with these proceedings, EquiMed and various other related plaintiffs commenced, actions against two insurance companies, Steadfast Insurance Company and Reliance Insurance Company, in State court in Pennsylvania, seeking coverage for some of the losses sustained by EquiMed and other companies. Those cases were removed to federal court and transferred to the District of Maryland for consideration in the bankruptcy of EquiMed.

The parties to these various adversary actions negotiated a complex settlement agreement that involved the creation of an estate in the custody of the bankruptcy trustee, the sale of various properties of EquiMed’s subsidiaries, the modification of related settlement agreements entered into by some of the parties, and various releases.

DVI, a creditor of EquiMed and some of its subsidiaries, objected to the global settlement agreement, arguing that its security interest in various of EquiMed’s assets were not recognized by the agreement. DVI had provided equipment financing to EquiMed and its subsidiaries, and it secured its loans with a security agreement covering the equipment and other assets of EquiMed including its accounts receivable and contract rights. DVI asserted that its security agreement covered EquiMed’s interests in management services agreements under which EquiMed operated the cancer centers in exchange for net profits from those cancer centers. DVI also asserted that it had a security interest in offset rights in promissory notes given by subsidiaries Keystone Oncology, LLC, Oaktree Cancer Care, Inc., and Rosewood Cancer Care, Inc., all of which were surrendered as part of the settlement agreement.

The district court rejected DVI’s assertion of security interests in both the management services agreements and the offset rights in the surrendered notes. With respect to the management services agreements, the court stated that the agreements could not be characterized as “accounts receivable” or “contract rights,” which were covered by the security agreement. The court pointed to the fact that the Pennsylvania Uniform Commercial Code, which governed the security agreement, distinguishes “account” from “general intangible,” defining “account” (and “contract right”) as “[a]ny right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance,” and defining “general intangible” as “[a]ny personal property ... other than goods, accounts, chattel paper, documents, instruments, investment property and money.” 13 Pa. Cons.Stat. § 9106; see also U.C.C. § 9-106 Official Comment (stating that the term “contract right” is included in the definition of “account”). The court determined that the relationship between EquiMed and the various cancer centers to which it supplied management services was a continuing undertaking rather than a simple contract between the parties for the sale of services. On that basis, the court characterized the agreements as general intangibles, and because Provident Bank, not DVI, had the lien on EquiMed’s general intangibles, the court rejected DVI’s claim to any value in the management service agreements and any proceeds they contributed to the settlement.

The district court also stated that even if DVI did hold an interest in the management services agreements, that interest was likely extinguished prior to bankruptcy based on “convincing” evidence that the agreements were terminated pre-petition. The court also recognized that any valid interest of DVI in the agreements could not then attach because, given the extensive network of relationships between the various corporations owned and operated by Colkitt, settlement of the adversary proceeding “cannot be characterized as being the recovery of accounts receivable or contract rights” but rather “the bundle of various intangible rights” related to the entire operating business of the cancer centers. The court noted, as an example, that EquiMed’s right to control the cancer centers derived not only from the management services agreements but also from its option to purchase each center for one dollar.

With respect to DVI’s claimed interest in the proceeds contributed to the settlement through the surrender by Keystone, Rosewood, and Oaktree of their offset rights in the promissory notes, the district court held that DVI had no lien on the proceeds because DVI had no security interest in the rights themselves. The court also found that the rights were surrendered in exchange for a release from Provident Bank, the holder of the notes, rather than any release from the trustee as to liability for fraudulent conveyance of assets subject to interests claimed by DVI.

DVI appealed the district court’s order approving the global settlement agreement, asserting the same arguments that it did before the district court.

We have carefully reviewed the record and considered the arguments of counsel made in their briefs and at oral argument. For the reasons set forth in the district court’s opinion, see United States ex rel. Rahman v. Oncology Associates, P.C., CA-95-2241-H, CA-00-1216-H, BK-00-11147, AP-00-1180-8, CA-01-2676-H, BK-00-20825-PM, BK-00-20826-PM, BK-00-20827-PM, CA-01-3014-H, AP-00-1430 (D.Md. Nov. 1, 2001), we affirm the judgment of the district court.

AFFIRMED.