In re Vascular Access Ctrs., L.P.

630 B.R. 137

IN RE: VASCULAR ACCESS CENTERS, L.P., Debtor.

Case No. 19-17117 (AMC)

United States Bankruptcy Court, E.D. Pennsylvania.

Signed June 25, 2021

Anne M. Aaronson, Lawrence G. McMichael, Jesse N. Silverman, Dilworth Paxson LLP, Philadelphia, PA, for Debtor.

Stephen V. Falanga, Peter Joseph Pizzi, Walsh Pizzi O'Reilly Falanga LLP, Sydney J. Darling, Christopher M. Hemrick, Eric S. Padilla, Newark, NJ, for Trustee.

MEMORANDUM OPINION

Ashely M. Chan, United States Bankruptcy Judge

I. INTRODUCTION

In early February 2020, after finding that Dr. James McGuckin ("McGuckin"), the former sole member and manager of the former general partner of the debtor, Vascular Access Centers, L.P. ("VAC" or "Debtor"), had orchestrated an involuntary petition under Chapter 11 of the Bankruptcy Code against VAC in bad faith and that appointing a Chapter 11 trustee would serve the best interests of VAC's creditors, the Court ordered the appointment of a Chapter 11 trustee ("Trustee Order"). McGuckin and VAC's former general partner, Vascular Access Centers, LLC ("VAC LLC" or "General Partner"), quickly appealed the Trustee Order. Now, following the dismissal of the appeal with a remand for this Court to determine whether reconsideration of the Trustee Order is warranted in light of certain new evidence advanced by McGuckin, McGuckin and VAC LLC move for this Court to recuse itself from proceedings which directly involve the rights and interests of McGuckin or any of his solely and majority owned entities on the basis of certain circumstances surrounding the Court's issuance of the Trustee Order and supporting opinion ("Trustee Opinion"), well over a year after they were entered ("Recusal Motion"). McGuckin and VAC LLC ground their request in 28 U.S.C. § 455. For the reasons described below, the Recusal Motion is denied.

II. BACKGROUND

The background relating to the Court's decision to appoint a Chapter 11 trustee is thoroughly described in the Trustee Opinion. Accordingly, the Court will only recount those circumstances necessary to the disposition of the Recusal Motion.

VAC was founded by McGuckin as a Pennsylvania limited partnership through a limited partnership agreement ("LPA") executed on April 22, 2005. Op. 1, Feb. 7, 2020 ("Op."). As mentioned supra, the general partner of VAC was a non-debtor entity, VAC LLC, of which McGuckin was the sole member and manager. Id. As of the petition date, VAC operated its business through a number of limited liability company subsidiaries. Case No. 19-17117 ECF No. ("ECF") 21 Mot. for Cash Coll. ¶ 8; Op. 2. The subsidiaries operated and managed outpatient vascular access centers, whereby physician interventionalists performed dialysis access procedures and certain other vascular access procedures on patients with end-stage renal disease and other vascular conditions or diseases. Op. 2.

In May 2005, William Whitfield Gardner ("Gardner") became a limited partner of VAC. Id . Gardner's investments and substantial capital infusion into VAC made him the majority-in-interest limited partner. Id. Pursuant to an amended version of the LPA, the general partner was prohibited from making certain fundamental decisions without the consent of the holders of a majority of all limited partners, including the decision to execute and file on behalf of the partnership a petition for relief under the United States Bankruptcy Code under which a partnership may be a debtor. Id. at 3.

Over time, Gardner began to have concerns about the possibility that McGuckin was engaging in impermissible self-dealing transactions and violating his duties as the sole member of VAC's general partner. Id. at 4. Based upon his concerns, on January 13, 2016, Gardner commenced a derivative action on behalf of VAC by filing a complaint in the Delaware County Court of Common Pleas ("State Trial Court") against VAC LLC and McGuckin, in his capacity as VAC LLC's sole member and manager, for breach of fiduciary duty, breach of contract, and unjust enrichment ("Derivative Litigation"). See Gardner v. Vascular Access Centers, LLC et al., No. 16-cv-00367; Op. 5. In September 2017, Gardner amended his complaint in the Derivative Litigation to, inter alia , add other limited partners of VAC as plaintiffs (together with Gardner, "Derivative Litigation Plaintiffs"). Op. 7. On October 2, 2017, trial was set in the Derivative Litigation for July 12, 2018. Id. at 8.

Meanwhile, in early 2017, the Centers for Medicare and Medicaid Services implemented rate reductions for the types of services VAC's centers performed at the time. Id. at 7. Despite McGuckin's appeals to the limited partners for a capital infusion to convert VAC's centers to ambulatory surgical centers to enable VAC to take advantage of higher reimbursement rates for its services, many limited partners had previously expressed in writing their desire to have McGuckin step down in his role as member and manager of VAC's general partner. Id. at 8.

On July 9, 2018, just days before the trial in the Derivative Litigation, McGuckin filed a petition to compel arbitration. Id. at 10. On July 13, 2018, after an evidentiary hearing, the State Trial Court denied the petition to compel arbitration. Id . On July 16, 2018, McGuckin filed a notice of appeal of the denial of his petition to the Pennsylvania Superior Court. ("Superior Court"). Id. On April 22, 2019, the Superior Court unanimously ruled against McGuckin and affirmed the State Trial Court's decision to deny McGuckin's petition to compel arbitration. Id. at 15. McGuckin subsequently filed an application for reargument en banc on May 6, 2019. Id. On June 12, 2019, the Superior Court denied McGuckin's application for reargument. Id. The Derivative Litigation Plaintiffs subsequently filed a motion to recover certain attorneys' fees and costs. Id.

On July 3, 2019, independent CPA, Michael Dubin, who had been appointed financial monitor ("Monitor") in the Derivative Litigation to assess VAC's financial condition and solvency, filed his first report ("First Monitor Report") assessing VAC's financial condition as of March 31, 2019, finding that VAC was in poor financial health, was losing money from operations, had liabilities that substantially exceeded its assets, and was not likely solvent. Id. at 16. In the First Monitor Report, the Monitor observed

‘the Company's process for the preparation of its financial statements requires significant revision’ since the current process results in significant delay; that the company would benefit from internal, fully adjusted monthly, quarterly, and annual financial statements; that ‘it is clear that better internal controls are required to be implemented...’ and that ‘there are fewer individuals than would be optimal to maintain a system of checks and balances’ which subjects the company to a ‘greater likelihood of errors and/or misstatements in its financial reporting.’ Id. at 18 (citing First Monitor Report 23, 27).

The Monitor further observed that "VAC's past financial forecasts had not been reliable or consistent and differed depending on the intended purpose of the forecast" and that "the Company has over the period circa 2012 through 2017...sometimes ‘comingled’ funds of various entities including entities not owned by the Company. This practice is not appropriate and results in internal control weakness that can materially negatively affect the Company." First Monitor Report 27-28.

Meanwhile, on July 10, 2019, McGuckin filed a petition for allowance of appeal with the Pennsylvania Supreme Court. Op. 18. On July 31, 2019, the Superior Court granted the Derivative Litigation Plaintiffs' motion to recover certain attorneys' fees and costs, concluding that McGuckin's "submission and reliance upon documents that were not part of the record at the trial court was frivolous, and therefore [Plaintiffs] are entitled to reasonable attorneys' fees for having to respond to the documents on appeal" and that "the petition for re-argument was also frivolous, and only done to further delay this matter," entitling the Derivative Litigation Plaintiffs to fees for responding to the petition. Op. 18-19.

On October 12, 2019, the Monitor issued another report ("Second Monitor Report") comparing VAC's financial condition in August 2019 to June 2019. Id. at 19. The Monitor concluded that VAC's financial condition "is not materially worse at August 31, 2019 as compared to June 30, 2019," but that "the Company's cash position remains extremely tight and is inadequate to satisfy its obligations on a current basis." Id. (citing Second Monitor Report 4, 7). The Monitor emphasized that if VAC was going to survive, it had to quickly find a way to satisfy "a variety of demands on its cash through December 31, 2019..." Id. (citing Second Monitor Report 5-7). The Monitor also observed that "the Company also needs to improve its ability to prepare accurate, complete financial statements supported by trial balances and appropriate supporting documentation." Id. (citing Second Monitor Report 14).

On October 17, 2019, VAC LLC, through McGuckin, met with Dilworth Paxson LLP ("Dilworth") to obtain legal services in connection with VAC's financial restructuring. Id. at 20. Subsequently, Dilworth sought Gardner's consent as the majority limited partner to file a voluntary Chapter 11 bankruptcy petition on behalf of VAC. Id. Initially, Gardner preferred to explore resolutions outside of bankruptcy and requested terms for consent. Id. On November 7, 2019, Dilworth contacted counsel for Gardner in the Derivative Litigation to continue seeking Gardner's consent to the filing of a Chapter 11 bankruptcy petition. Id.

On November 8, 2019, counsel responded that Gardner would be willing to consider consenting to a bankruptcy petition upon receiving certain information, including, inter alia, more information about who would run VAC during the bankruptcy. Id . Dilworth responded on November 11, 2019 that VAC contemplated no management changes and...