Arrowsmith v. Christian Life Assembly of Columbia (In re Health Diagnostic Lab.)

1

In re: HEALTH DIAGNOSTIC LABORATORY, INC., et al., Debtors.^[1]

RICHARD ARROWSMITH AS LIQUIDATING TRUSTEE OF THE HDL LIQUIDATING TRUST, Plaintiff, v. CHRISTIAN LIFE ASSEMBLY OF COLUMBIA, SOUTH CAROLINA, INC., d/b/a CHRISTIAN LIFE CHURCH and SOUTH CAROLINA SCHOOL OF LEADERSHIP, Defendant.

RICHARD ARROWSMITH AS LIQUIDATING TRUSTEE OF THE HDL LIQUIDATING TRUST, Plaintiff, v. LAKE MURRAY BAPTIST CHURCH, Defendant.

No. 15-32919-KRH

Adv. Pro. Nos. 22-03020-KRH, 22-03036-KRH

United States Bankruptcy Court, E.D. Virginia, Richmond Division

June 10, 2024

Chapter 11 (Jointly Administered)

MEMORANDUM OPINION

KEVIN R. HUENNEKENS, UNITED STATES BANKRUPTCY JUDGE

On April 8, 2022, Richard Arrowsmith, in his capacity as the Liquidating Trustee of the HDL Liquidating Trust (the "Liquidating Trustee"),^[2] filed a Complaint to Recover Avoidable Transfers against Christian Life Assembly of Columbia, South Carolina, Inc., d/b/a Christian Life Church and the South Carolina School of Leadership ("CLC") in the United States Bankruptcy Court for the Eastern District of Virginia (the "Court"). Compl. to Recover Avoidable Transfers, Adv. Pro. No 22-03020, ECF No. 1, as amended at ECF No. 18. On May 9 2022, the Liquidating Trustee filed a similar complaint in this Court against Lake Murray Baptist Church ("LMBC," and together with CLC, the "Defendants"). Compl. to Recover Avoidable Transfers, Adv. Pro No. 22-03036, ECF No. 1, as amended at ECF No. 19.^[3]

The Complaints filed by the Liquidating Trustee seek to recover funds under section 550(a) of Title 11 of the United States Code (the "Bankruptcy Code") that the Liquidating Trustee claims were fraudulently transferred from the Debtors' bankruptcy estate (the "Bankruptcy Estate") to Floyd Calhoun Dent, III ("Dent") and BlueWave Healthcare Consultants, Inc. ("BlueWave"), and then were transferred by Dent and BlueWave to CLC and LMBC. The Liquidating Trustee maintains that by employing commonly accepted forensic methodologies he can trace $1,149,900 of the Debtors' fraudulently transferred funds into CLC and that he can trace $238,512 of the Debtors' fraudulently transferred funds into LMBC. The Defendants have denied each of the Liquidating Trustee's relevant allegations. Def. CLC's Answer to Am. Compl. to Recover Avoidable Transfers, Adv. Pro. No. 22-03020, ECF No. 21; Def. LMBC's Answer to Am. Compl. to Recover Avoidable Transfers, Adv. Pro. No. 22-03036, ECF No. 21. As the legal arguments presented by counsel for the Liquidating Trustee and by counsel for the Defendants were substantially similar, the parties agreed to conduct the trials in these two Adversary Proceedings concurrently on March 12 and 13, 2024 (the "Trial").^[4]

Although the facts underlying these Chapter 11 Cases have been well documented in the litigation that has ensued throughout the Fourth Circuit since HDL's business imploded in 2015, see, e.g., United States v. Mallory, 988 F.3d 730 (4th Cir. 2021); Arrowsmith v. Warnick (In re Health Diagnostic Lab'y, Inc.), Adv. Pro. No. 17-04300, 2018 WL 4676339, 2018 Bankr. LEXIS 2953 (Bankr. E.D. Va. Sept. 27, 2018); United States ex rel. Lutz v. Berkeley HeartLab, Inc., Civil Action No. 9:14-230-RMG, 2017 WL 5033652, 2017 U.S. Dist. LEXIS 179876 (D.S.C. Oct. 31, 2017), the parties were not able to stipulate to many of the pertinent facts giving rise to the instant proceedings. See Joint Stipulation of Fact, Adv. Pro. No. 22-03020, ECF No. 86 [hereinafter Joint Stip.]. Based on the evidence presented by the parties at Trial, the record in these Adversary Proceedings now before the Court, the record in the underlying Chapter 11 Cases, and the record in the associated adversary proceedings arising in the Chapter 11 Cases, the Court makes the following findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.^[5]

Jurisdiction

The Court has subject matter jurisdiction over these Adversary Proceedings under 28 U.S.C. §§ 157 and 1334(b) and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. Each Adversary Proceeding is a constitutionally core proceeding under 28 U.S.C. § 157(b)(2)(A), (E), (H) and (O), because the cause of action brought by the Liquidating Trustee is a proceeding "arising in" these Chapter 11 Cases under Title 11. See Stern v. Marshall, 564 U.S. 462, 474 (2011) (Bankruptcy courts "may hear and enter final judgments in 'all core proceedings arising under title 11, or arising in a case under title 11.'" (quoting 28 U.S.C. § 157(b)(1))). Venue is appropriate pursuant to 28 U.S.C. § 1409(a).

Factual Background

HDL was formed as a start-up laboratory in Richmond, Virginia offering a panel of blood tests for early detection of cardiovascular disease, diabetes, and related illnesses. Proposed Findings of Fact & Conclusions of Law at 6, Adv. Pro. No. 16-03271 (Bankr. E.D. Va. May 24, 2021), ECF No. 1461 at 6 [hereinafter PFFCL].^[6] Dent was a shareholder of HDL and a principal and insider of HDL's exclusive sales agent and marketing consultant, BlueWave. Id. at 6 n.13, 7, Adv. Pro. No. 16-03271, ECF No. 1461 at 6 n.13, 7. Pursuant to a Sales Agreement executed between HDL and BlueWave (the "BlueWave Agreement"), HDL paid commissions to BlueWave from 2010 through 2014 totaling more than $220 million. Id. at 8 & n.15, Adv. Pro. No. 16-03271, ECF No. 1461 at 8 & n.15. A substantial portion of these commissions was subsequently transferred to Dent and the Dent Entities,^[7] one of which was HisWay of South Carolina, Inc. ("HisWay"). Id. at 3 n.5, 8, Adv. Pro. No. 16-03271, ECF No. 1461 at 3 n.5, 8.

In or around 2012, the U.S. Department of Justice (the "DOJ") began investigating whether the business practices set forth in the BlueWave Agreement violated the federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b. Id. at 8, Adv. Pro. No. 16-03271, ECF No. 1461 at 8. In 2015, BlueWave terminated the BlueWave Agreement.^[8] Id. at 9, Adv. Pro. No. 16-03271, ECF No. 1461 at 9. HDL and the DOJ entered into a settlement agreement resolving the DOJ's allegations later that same year. Id. Shortly thereafter on June 7, 2015, HDL filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.^[9] Voluntary Pet. for Relief, In re Health Diagnostic Lab'y, Case No. 15-32919 (Bankr. E.D. Va. Jun. 7, 2015), ECF No. 1. This Court confirmed the Plan, by its Confirmation Order entered May 12, 2016. The Plan became effective the same day. Notice of: (I) Entry of Order Confirming Second Am. Plan of Liquidation Proposed by the Debtors; (II) Occurrence of Effective Date; & (III) Deadline for Filing Admin. Expense Claims, Fee Claims, & Claims Arising from Rejection of Executory Contracts or Unexpired Leases, In re Health Diagnostic Lab'y, Inc., Case No. 15-32919 (Bankr. E.D. Va. May 12, 2016), ECF No. 1097.

The Plan substantively consolidated the Debtors' bankruptcy estates and created the Liquidating Trust, a grantor trust, for the benefit of holders of allowed general unsecured claims, subordinated claims, and interests of HDL. See Plan §§ 1.66, 1.69, 5.1-5.3, In re Health Diagnostic Lab'y, Case No. 15-32919 (Bankr. E.D. Va. May 12, 2016), ECF No. 1095 at 60, 61, 72. Richard Arrowsmith was appointed as the Liquidating Trustee responsible for administering the Liquidating Trust in accordance with a Liquidating Trust Agreement. Id. § 1.74, In re Health Diagnostic Lab'y, Case No. 15-32919 (Bankr. E.D. Va. May 12, 2016), ECF No. 1095 at 62. The Plan vested all property of the consolidated Debtors' bankruptcy estates, including litigation claims, in the Liquidating Trust. Id. § 6.5(h), In re Health Diagnostic Lab'y, Case No. 15-32919 (Bankr. E.D. Va. May 12, 2016), ECF No. 1095 at 85. The Liquidating Trust became "the successor of the Debtors . . . for all purposes." Plan §§ 6.5(c)(23), (e), In re Health Diagnostic Lab'y, Case No. 15-32919 (Bankr. E.D. Va. May 12, 2016), ECF No. 1095 at 83, 84; Modified Liquidating Tr. Agreement ¶ 4.1(w), In re Health Diagnostic Lab'y, Case No. 15-32919 (Bankr. E.D. Va. Mar. 25, 2016), ECF No. 999 at 12.

The Liquidating Trustee filed an amended complaint on August 17 2017, which sought to avoid and recover certain fraudulent transfers under sections 547, 548, and 550 of the Bankruptcy Code against the former shareholders and insiders of the Debtors, including BlueWave, Dent, and HisWay, among others. See First Am. Compl., Arrowsmith v. Mallory, Adv. Pro. No. 16-03271 (Bankr. E.D. Va. Aug. 17, 2017), ECF No. 375 [the foregoing adversary proceeding, hereinafter BlueWave Litigation]. After the Fourth Circuit affirmed that the payment scheme set out in the BlueWave Agreement violated the FCA, Mallory, 988 F.3d at 734, the District Court adopted this Court's findings that the BlueWave Agreement was void as a matter of law and, therefore, that the Debtors "received no legally-recognizable value from the illegal and unenforceable BlueWave Agreement," Arrowsmith v. Mallory (In re Health Diagnostic Lab'y, Inc.), Case No. 3:17-cv-400-HRH, 2021 WL 4099012, at *3, 2021 U.S. Dist. LEXIS 170582, at *9 (E.D. Va. Sep. 8, 2021). As the transfers that the Debtors had made to Dent, the Dent Entities, and BlueWave were made without value, they were avoided as fraudulent transfers under sections 548(b) and 544(b) of the Bankruptcy Code, the latter utilizing 28 U.S.C. §§ 3001-3008.^[10] Id. at *3-4, 2021 U.S. Dist. LEXIS 170582, at *9-10, *12. The Liquidating Trustee obtained a now final and unappealable judgment in the BlueWave Litigation allowing him to recover the $220,336,247.91 in funds that BlueWave had received from the Debtors and the $770,661.00 in funds that Dent had received from the Debtors (collectively, the "Avoided Transfers"). See Order...