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Reynolds v. Behrman Capital IV L.P.

United States District Court, N.D. Alabama, Southern Division

September 6, 2018

THOMAS E. REYNOLDS, as Trustee, Plaintiff,
v.
BEHRMAN CAPITAL IV L.P., et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          ANNEMARIE CARNEY AXON UNITED STATES DISTRICT JUDGE.

         This matter comes before the court on Plaintiff's motion to remand this case under 28 U.S.C. § 1447 or, in the alternative, to abstain or refer the case to the bankruptcy court. (Doc. 26). For the reasons set out below, the court GRANTS IN PART and DENIES IN PART the motion.

         The court concludes that, under 28 U.S.C. § 1334(b), it has original jurisdiction over every claim in the complaint because each claim either arises under the Bankruptcy Code, or arises in or relates to a case under the Bankruptcy Code. Having determined that the court has original jurisdiction over the case, the court next sua sponte SEVERS Counts One through Seven, Counts Eight through Ten, and Counts Eleven through Thirteen, because they are misjoined.

         The court finds that neither mandatory nor permissive abstention preclude it from considering Counts One through Seven or Eleven through Thirteen, but mandatory abstention requires it to abstain from considering Counts Eight through Ten. As a result, the court DENIES the motion to remand Counts One through Seven and Eleven through Thirteen, but GRANTS the motion to remand Counts Eight through Ten.

         Finally, the court considers whether to refer Counts One through Seven and Eleven through Thirteen to the bankruptcy court. Because consideration of those counts may involve a determination of non-bankruptcy federal law, the court DENIES the request to refer those counts to the bankruptcy court.

         I. BACKGROUND

         In March 2018, Plaintiff Thomas Reynolds, as Chapter 7 trustee of the estates of Atherotech Inc. and Atherotech Holdings, filed this lawsuit in the Circuit Court of Jefferson County, Alabama, naming thirty-two defendants. (See Doc. 1-1 at 9-40). For ease of reference, the court divides the defendants into three groups: the “Investors, ” “Behrman Management, ” and “Mintz Levin.”

         Atherotech Holdings was the sole shareholder of Atherotech Inc. (Id. at 16). In turn, the Investors are all companies or board members of companies that were shareholders of Atherotech Holdings: Behrman Capital IV, LP; Behrman Brothers IV, LLC; MidCap Financial Investment, LP; AXA Primary Fund America IV, LP; AXA Private Capital I, LP; Core Americas/Global Holdings, LP; CS Strategic Partners IV Investments, LP; Global Fund Partners II, LP; MetLife Insurance Company of Connecticut; Partners Group Direct Investments 2006, LP; Partners Group Global Opportunities Subholding Limited; PE Holding USD Gmbh; Portfolio Advisors Secondary Fund, LP; Stepstone Private Equity Partners III Cayman Holdings, LP; StepStone Private Equity Partners III LP; the Governor an Company of the Bank of Ireland; Varma Mutual Pension Insurance Company; ASF III Bluenote Limited; the Douglas E. Behrman Trust; the Kimberly E. Behrman Trust; Amanda Zeitlin; Greg Behrman; Gregory Chiate; Gary Dieber; Mark Grimes; Simon Longergan; William Matthes; Michael Rapport; Padyut Shah; and Jeffrey Wu. (Id. at 16-18).

         The two remaining sets of defendants are made up of a single defendant each. Behrman Management is Behrman Brothers Management Corporation, which provided financial and operational advice to Atherotech Inc. (Doc. 1-1 at 19). And Mintz Levin is Mintz, Levin, Cohn, Ferris, Govsky, and Popeo, PC., a law firm that represented Atherotech Inc. (Id. at 27).

         The complaint alleges that Atherotech Inc. operated a laboratory that conducted testing on blood cholesterol levels. (Id. at 20). Atherotech Inc. would pay physicians who ordered such testing a processing and handling fee, also known as a P&H fee. (Id.). Beginning in 2011, Behrman Management advised Atherotech Inc. to grow by increasing direct sales to physicians, a plan that Berhman Management knew would require Atherotech Inc. to pay P&H fees. (Id. at 21).

         Although Medicare rules and regulations prohibit the payment of P&H fees, Atherotech Inc. would nevertheless submit claims that included the payment of those fees to Medicare and other federal healthcare programs. (Id. at 20-21). Mintz Levin advised Atherotech Inc. to report its competitors' payments of P&H fees to the Department of Justice and, although Mintz Levin “knew or should have known that Atherotech's practice of paying P&H fees put Atherotech at risk of violating the False Claims Act, ” it failed to advise Atherotech Inc. to stop making those payments. (Id. at 27-29).

         In 2012, the Department of Justice began to investigate Atherotech Inc.'s payments of P&H fees for violation of the federal False Claims Act, 31 U.S.C. §§ 3729-3730, and the federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b. (Id. at 21, 28). In 2013, while the Department of Justice investigation was ongoing, Atherotech Inc.-already insolvent in light of contingent liabilities for violations of the False Claims Act-executed a dividend recapitalization under which it paid Atherotech Holdings' shareholders millions of dollars. (Id. at 23-24, 26). But until June 2014, Berhman Management continued to advise Atherotech Inc. to continue paying physicians P&H fees. (Id. at 22). By July 2014, Atherotech could no longer pay P&H fees and its revenues decreased significantly. (Id. at 29).

         In March 2016, Atherotech Inc. and Atherotech Holdings filed for bankruptcy. (Id. at 16-17). Among other creditors, Mintz Levin filed a claim against Atherotech Inc. (Id. at 29). The bankruptcy court appointed Mr. Reynolds as the Chapter 7 trustee for Atherotech Inc. and Atherotech Holdings. (Id. at 16).

         Mr. Reynolds filed this lawsuit, asserting the following sets of claims. The first set (Counts One through Seven) asserts against various combinations of the Investors claims of intentionally fraudulent transfer, constructively fraudulent transfer, and recovery of fraudulent transfer, citing the Bankruptcy Code and Alabama law. (Doc. 1-1 at 30-34). Specifically, Counts One, Two, and Three allege intentionally fraudulent transfer and constructively fraudulent transfer under 11 U.S.C. § 544 and Alabama law. (Id. at 30-32). Counts Four, Five, Six, and Seven seek recovery of fraudulent transfer under 11 U.S.C. § 550(a)(1) and (a)(2). (Id. at 32-34). This first set of claims relates to Atherotech Inc's payment of the dividend to its investors. (Id.).

         The second set (Counts Eight though Ten) asserts against Behrman Management state law claims of negligence, breach of contract, and breach of fiduciary duty. (Id. at 34-37). Those claims all relate to Behrman Management's advice about the amount of debt and equity that Atherotech Inc. should maintain, the advisability of paying out the dividend in 2013, and the business strategy of paying P&H fees to physicians. (Id.).

         The final set (Counts Eleven through Thirteen) asserts against Mintz Levin state law claims of unjust enrichment and negligence, and an objection to Mintz Levin's bankruptcy claim. (Id. at 37-39). Those claims all relate to Mintz Levin's failure to advise Atherotech Inc. to stop paying P&H fees. (Id.).

         Defendants removed the case to this court under 28 U.S.C. § 1441(a), contending that the court has federal question jurisdiction because, although each cause of action alleged is one of state law, to prevail on each claim Mr. Reynolds will have to prove that Atherotech Inc. violated the Anti-Kickback Statute or the False Claims Act. (Doc. 1 at 3-4). See Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308, 312 (2005) (“[I]n certain cases federal-question jurisdiction will lie over state-law claims that implicate significant federal issues.”). They also argue that the court has federal question jurisdiction because Counts One through Seven arise under the Bankruptcy Code. (Doc. 1 at 10). Finally, they assert that removal is proper under 28 U.S.C. § 1452(a) because the court has jurisdiction under 28 U.S.C. § 1334(b), which provides “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” (Doc. 1 at 11). Title 11, of course, is the Bankruptcy Code.

         II. DISCUSSION

         Federal law permits defendants to remove “any civil action brought in a State court of which the district courts of the United States have original jurisdiction.” 28 U.S.C. § 1441(a). Of relevance to this case, federal courts have original jurisdiction if (1) the action “aris[es] under the Constitution, laws, or treaties of the United States, ” 28 U.S.C. § 1331; (2) the case “aris[es] under title 11, or aris[es] in or relate[s] to cases under title 11, ” 28 U.S.C. § 1334(b); or (3) the amount in controversy exceeds $75, 000 and the parties are completely diverse, 28 U.S.C. § 1332(a).

         The court notes that Defendants do not-and cannot-assert that the court has diversity jurisdiction, because at least some of the defendants share their Delaware citizenship with Mr. Reynolds.[1] (See Doc. 1-1 at 10-15). Instead, they contend that the court has federal question jurisdiction under § 1331 because the state law claims are all based on purported violations of federal law. (Doc. 1 at 3- 10). In the alternative, Defendants assert that the court has federal question jurisdiction over Counts One through Seven under § 1334(b). (Id. at 10-12).

         Mr. Reynolds moves to remand the case to the Jefferson County Circuit Court. (Doc. 26). He contends that the court lacks subject matter jurisdiction because his claims do not involve an “actually disputed and substantial” question of federal law, as he can prevail even without proving a violation of any federal statute. (Id. at 6-12). And he argues that, although 28 U.S.C. § 1334(b) confers original jurisdiction on the court, § 1334(c)(2) requires the court to abstain from hearing the case. (Id. at ...


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