KEVIN R. HUENNEKENS, Bankruptcy Judge.
Before the Court in this contested matter is the motion (the "Motion") filed by Richard Arrowsmith, in his capacity as the Liquidating Trustee of the HDL Liquidating Trust (the "Liquidating Trustee")
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")
The Liquidating Trustee filed his Motion on September 1, 2016. Tipton Golias, Joseph Golias, Donald Golias, Wyndell L Golias Voting Trust, Helena Laboratories Corporation, Karla Falgout, Pamela Oates, Eric Petersen, John Tessler, David Mayes, Noel Bartlett, Robert Galen, Joseph McConnell, LaTonya S. Mallory, and G. Russell Warnick filed objections to the Motion on September 15, 2016. Satyanarain Rangarajan, Floyd Calhoun Dent, III, Bradley Johnson, and BlueWave Healthcare Consultants, Inc. filed joinders to the objections to Settlement Agreement.
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)(A). Venue is appropriate in this Court pursuant to 28 U.S.C. § 1408.
In January of 2013 the United States Department of Justice ("DOJ") commenced an investigation into the Debtors' delivery of health care services. The investigation focused on whether the Debtors' business practice of paying a processing and handling fee to referring physicians in connection with collecting, processing, and packaging blood specimens violated certain federal anti-kickback laws. As the DOJ investigation continued, the Office of Inspector General for the Department of Health and Human Services issued a special fraud alert (the "Special Fraud Alert") regarding laboratory payments to referring physicians on June 25, 2014. Related litigation instituted by a number of private payors ensued (the "Litigation"). On April 9, 2015, the DOJ announced a settlement with HDL whereby HDL agreed to pay $47 million to resolve all the government claims against it in connection with the referral fees (the "DOJ Settlement"). HDL commenced these chapter 11 Cases as a result of the claims asserted in the Litigation and the DOJ Settlement.
LeClairRyan provided legal services to the Debtors prior to the Petition Date. HDL asserted claims against LeClairRyan from the early stages of the bankruptcy Cases. On October 26, 2015, the Chief Restructuring Officer of HDL sent a demand letter to LeClairRyan. HDL assigned the claims it held against LeClairRyan to the HDL Liquidating Trust on the Effective Date of the Plan.
The pertinent provisions of the Settlement Agreement provide for LeClairRyan to pay the HDL Liquidating Trust the sum of $20,375,000. See LeClairRyan Settlement Agreement, at Ex. A, § 6, In re Health Diagnostic Laboratories, Inc., No. 15-32919 (Bankr. E.D. Va. Feb. 9, 2016) ECF No. 1443. The parties will release all claims that each has against the other.
The Liquidating Trustee seeks approval of the Settlement Agreement pursuant to Bankruptcy Rule 9019. The Settlement Agreement was negotiated by the Liquidating Trustee under the supervision of the Liquidating Trust Oversight Committee.
Bankruptcy Rule 9019 allows a trustee, after notice and a hearing, to settle a matter with the approval of the Court.
"All compromises must be `fair and equitable.'" In re Alpha Nat. Res., Inc., et al., 544 B.R. 848, 857 (Bankr. E.D. Va. 2016) (citing Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. at 424). The court analyzes four factors in determining whether to approve a settlement under this standard: (i) the probability of success in litigation; (ii) the potential difficulties in any collection; (iii) the complexity of the litigation and the expense, inconvenience, and delay necessarily attending it; and (iv) the paramount interest of the creditors. See In re Frye, 216 B.R. at 174 (citing In re Martin, 91 F.3d 389, 393 (3d. Cir. 1996)); see also In re Three Rivers Woods, Inc., No. 98-38685, 2001 WL 720620 at *5-6 (Bankr. E.D. Va. Mar. 20, 2001). "In essence, a compromise or settlement will likely gain approval if it is both `fair and equitable,' as well as representative of the best interests of the estate as a whole." In re Three Rivers Woods Inc., 2001 WL 720620 at *6 (internal citations omitted). A bankruptcy judge is not required to "conduct a full evidentiary hearing or mini trial" before approving a settlement. In re Austin, 186 B.R. 397, 400 (Bankr. E.D. Va. 1995) (quoting In re W.T. Grant Co., 699 F.2d 599, 608 (2d Cir. 1983)); see also DePoister v. Mary M. Holloway Found., 36 F.3d 582, 586 (7th Cir. 1994)). Instead, the Court must decide "whether the settlement falls `below the lowest point in the range of reasonableness.'" In re Austin, 186 B.R. at 400; accord In re Alpha Nat. Res. Inc., 544 B.R. at 857.
The Court finds that the foregoing factors favor approval of the Settlement Agreement. The uncontroverted evidence presented at the Hearing
First, without the Settlement Agreement, the Liquidating Trustee would have had to engage in factually complex litigation with an uncertain outcome. The evidence shows that the Liquidating Trustee raised and discussed with LeClairRyan all of the claims that had been asserted in the demand letter as well as other claims that had been assigned to the HDL Liquidating Trust under the Plan. These included claims for the recovery of (i) intentional and constructive fraudulent conveyances under 11 U.S.C. § 548 and Va. Code Ann. §§ 55-80, 55-81, (ii) other avoidance actions under chapter 5 of the Bankruptcy Code, (iii) unlawful distributions to shareholders under Va. Code Ann. § 13.1-653, (iv) breach of fiduciary duty claims under Va. Code Ann. § 13.1-69, (v) common law conspiracy and statutory conspiracy claims under Va. Code Ann. § 18.2-499, (vi) claims for civil remedies against racketeer influenced and corrupt organizations under chapter 96 of title 18 of the United States Code, and (vii) claims for legal malpractice. The Liquidating Trustee assessed the various defenses LeClairRyan would be likely to raise during litigation. He considered the challenges presented by the standard of care, proximate cause, contributory negligence and the in pari delicto doctrine. Given the complexity of the claims the Liquidating Trustee would advance and of the defenses LeClairRyan would raise, the likelihood of success in the litigation was hardly assured.
Second, even if the litigation brought by the Liquidating Trustee turned out to be wildly successful, collection on a judgment could prove to be problematic. The testimony elicited at the Hearing indicated that "[l]aw firms are not blue-chips; they don't have millions just lying around; they're based on . . . what their lawyers do." Transcript of Hearing at 37, In re Health Diagnostic Laboratories, Inc., No. 15-32919 (Bankr. E.D. Va. Sept. 26, 2016) ECF 1503. The Liquidating Trustee evaluated the impact that causes of action other than malpractice might have on the collectability of a judgment if LeClairRyan's professional liability insurance were unable to cover those claims. The specified payment in the Settlement Agreement resolves any uncertainty about the Liquidating Trustee's ability to recover on the claims he has advanced.
Third, the Liquidating Trustee would incur significant costs pursuing the litigation. Many of the claims would require the production of fact intensive evidence at trial. Expert testimony would need to be presented to prove critical elements of causes of action such as legal malpractice and conspiracy. Expert testimony would also be required to establish damages. Litigation would likely be a prolonged process. Parties would likely appeal unfavorable decisions. Entry into the Settlement Agreement allows the Liquidating Trustee to avoid expensive and protracted litigation with an uncertain outcome.
Finally, the paramount interest of the creditors weighs in favor of approving the Settlement Agreement. The Settlement Agreement will provide for the infusion of $20,375,000 into the bankruptcy estate while fully resolving the Liquidating Trustee's claims against LeClairRyan. Over 699 creditors hold claims against the bankruptcy estate.
One of the Objectors, G. Russell Warnick ("Warnick"), argues that the Court should deny the benefit of the Settlement Agreement outright to all creditors. Warnick asserts that the amount of the Settlement Agreement is not reasonable in light of the full value of the Liquidating Trustee's claims against LeClairRyan. Warnick failed to provide any evidence in support of this contention. Instead, Warnick challenged the motives of the Liquidating Trustee in negotiating the Settlement Agreement. Warnick's assertions to the contrary notwithstanding, the Court need not explore the subjective motives behind the settlement of the legal claims. Bankruptcy Rule 9019 requires the application of an objective test. The Court must determine whether the settlement is fair and equitable to the bankruptcy estate, not to Warnick individually. Furthermore, the Court may consider the opinions of the Liquidating Trustee in assessing the relative fairness of the proposed compromise. See In re Three Rivers Woods, Inc., 2001 WL 720620, at *6. The Liquidating Trustee was entitled to "rely on his counsel and his counsel's judgment in reaching a determination whether or not to proceed with [the] settlement agreement." In re Lee Way Holding Co., 120 B.R. 881, 891 (Bankr. S.D. Ohio 1990). The Liquidating Trustee has carried his burden of proving that the Settlement Agreement is fair and equitable.
Warnick next asserts that the Liquidating Trustee deprived the Court of information that was necessary for the Court to properly evaluate the Settlement Agreement; and so the Court must deny the Motion for lack of evidentiary support. Warnick sought at the Hearing to illicit testimony from counsel for the Liquidating Trustee regarding his analysis of the legal positions the parties had advanced and his negotiating strategy.
In re Washington Mutual, Inc., 442 B.R. 314, 330 (Bankr. D. Del. 2011); see also In re Lee Way Holding Co., 120 B.R. at 897 (approving settlement where trustee's counsel "reviewed documents which . . . [were] successfully withheld . . . under assertions of privilege"). The Court will not invade the Liquidating Trustee's attorney/client privilege. The factual testimony presented at the Hearing was sufficient to allow the Court to assess whether the Settlement Agreement is reasonable. See id. at 330. The Court finds that it does have a reasonable evidentiary basis to approve the Settlement Agreement.
Another Objector, LaTonya S. Mallory ("Mallory"), raised concerns along with Warnick over whether the Settlement Agreement will release claims that they purport to hold individually against LeClairRyan. The Liquidating Trustee can only release claims constituting estate property. The Liquidating Trustee confirmed at the Hearing that the Settlement Agreement has no effect on particularized injuries to other persons. While the definition of HDL in the Settlement Agreement includes "former directors, officers, employees and agents of HDL," it does so only "to the extent they acted on behalf of or as a representative of HDL." See LeClairRyan Settlement Agreement, at Ex. A, ¶ 1(f), In re Health Diagnostic Laboratories, Inc., No. 15-32919 (Bankr. E.D. Va. Feb. 9, 2016) ECF No. 1443. The LeClairRyan release included in the Settlement Agreement only affects former officers and directors of HDL in their derivative, not individual capacities.
All of the Objectors addressed section 10 of the Settlement Agreement which provides that "LeClairRyan shall have and be entitled to the benefits and protections available to released parties under Code of Virginia § 8.01-35.1. . . ." See LeClairRyan Settlement Agreement, at Ex. A, § 10, In re Health Diagnostic Laboratories, Inc., No. 15-32919 (Bankr. E.D. Va. Feb. 9, 2016) ECF No. 1443.
The Objectors misapprehend the reference to Code of Virginia § 8.01-35.1 in the Settlement Agreement. The Liquidating Trustee does not seek, nor is he getting, a preajudication of the impact of Va. Code Ann. § 8.01-35.1 on any future claims or defenses that may be asserted by the Objectors in response to the Complaint.
Objectors Malory and Warnick contend that after the amendment of Va. Code Ann. § 8.01-35.1 in 2007, it no longer applies to economic damages. While the impact of the 2007 amendment is disputed by the parties,
The Court will grant the Motion and approve the Settlement Agreement. The Court finds that the Liquidating Trustee has met his burden under Bankruptcy Rule 9019 of proving that the Settlement Agreement represents a fair and equitable deal for all parties and is above the lowest point of reasonableness.
A separate order shall issue.
The Liquidating Trustee, as the successor to HDL's estate, is the only party that can assert or settle claims arising out of LeClairRyan's provision of legal services to HDL. The attorney-client relationship, an essential element of bringing a malpractice claim, only existed between LeClairRyan and HDL. See, e.g., Carstensen v. Chrisland Corp., 247 Va. 433, 447 (1994) ("The existence of an attorney-client relationship is essential to establishing a claim of legal malpractice.").Once settled, any direct or derivative claims arising out of the LeClairRyan claims are extinguished and cannot be asserted by any party.In re Ionosphere Clubs, Inc., 17 F.3d 600, 604 (2d Cir. 1994) (holding that derivative claims "belong exclusively to the [estate] and were extinguished by its settlement of those claims"). The only claims that could possibly be brought by Mallory or Warnick are those involving particularized injuries to themselves as individual creditors.