Kim v. NRAD Med. Assocs., P.C. (In re NRAD Med. Assocs., P.C.)

658 B.R. 1

IN RE: NRAD MEDICAL ASSOCIATES, P.C., Debtor.

Alice Kim, M.D., Corinne Tobin, M.D., David Kaplan, M.D.,

Elizabeth Lustrin, M.D., Jay Bosworth, M.D.,Jed Pollack, M.D., Colette Zito,as Executor of The Estate of Joseph Zito M.D.,and Julian Safir, M.D., Plaintiffs, v. NRAD Medical Associates, P.C., Defendant.

Case No. 15-72898 (LAS)

Adv. Pro. No. 20-08157 (LAS)

United States Bankruptcy Court, E.D. New York

Signed January 26, 2024

Howard B. Kleinberg, Meyer Suozzi English & Klein P.C., Garden City, NY, Jordan David Weiss, Meyer Suozzi English & Klein, P.C., Nassau, NY, for Plaintiffs.

Michael S. Amato, Ruskin Moscou Faltisckek PC, Uniondale, NY, for Defendant.

MEMORANDUM DECISION AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

Louis A. Scarcella, United States Bankruptcy Judge

Plaintiffs Alice Kim, M.D., Corinne Tobin, M.D., David Kaplan, M.D., Elizabeth Lustrin, M.D., Jay Bosworth, M.D., Jed Pollack, M.D., Colette Zito, as Executor of the Estate of Joseph Zito M.D., and Julian Safir, M.D. (collectively, "Plaintiffs") commenced this adversary proceeding against NRAD Medical Associates, P.C. ("NRAD" or "Debtor") alleging that the proceeds received by NRAD from the demutualization of Medical Liability Mutual Insurance Company ("MLMIC") constitute property of the estate and must be distributed to Plaintiffs in respect of their allowed general unsecured claims in accordance with NRAD's confirmed chapter 11 plan. Plaintiffs also allege that NRAD did not disclose the medical malpractice insurance policies during the plan negotiation process and failed to disclose the policies and demutualization plan when NRAD requested, post-confirmation, that Plaintiffs discount their maximum distribution under the confirmed chapter 11 plan by 13.33%, i.e., a discount of $999,750, in connection with NRAD's sale of its ownership interest in Meridian Imaging Group, LLC to NYU Langone Medical Center. According to Plaintiffs, had they known that NRAD was eligible to receive proceeds from the MLMIC demutualization, they would not have agreed to discount the maximum distribution by accepting a payout from the proceeds received by NRAD from the NYU-Meridian transaction. Plaintiffs contend that the failure to disclose the medical malpractice insurance policies and the demutualization plan has enabled the current shareholders to reap the benefit of the $999,750 discount and renders NRAD accountable under theories of negligent misrepresentation, fraudulent inducement, fraudulent concealment, and breach of fiduciary duty. Correspondingly, Plaintiffs claim they should not be bound by the agreement to discount their maximum distribution under NRAD's confirmed chapter 11 plan.

For its part, NRAD has a different view as to the disposition of the proceeds from the demutualization of MLMIC. NRAD contends that the medical malpractice insurance policies in question were terminated prior to the commencement of its chapter 11 case. Thus, NRAD argues that it had no duty to disclose the policies during its chapter 11 case or thereafter, and that neither the policies themselves nor any of the proceeds received by NRAD from the MLMIC demutualization constitute property of the estate available for distribution to Plaintiffs in respect of their allowed unsecured claims. NRAD, therefore, maintains that Plaintiffs first claim for relief to enforce the chapter 11 plan and distribute the proceeds to Plaintiffs fails. NRAD further argues that Plaintiffs' remaining claims for relief for negligent representation, fraudulent inducement, fraudulent concealment, and breach of fiduciary duty likewise fail because (i) each of these claims is predicated on a finding that the policies and the proceeds received from the MLMIC demutualization are property of the estate, (ii) NRAD was not aware of the demutualization plan at the time it negotiated the discounted maximum distribution due Plaintiffs under the confirmed chapter 11 plan, and (iii) Plaintiffs are bound by the terms of the agreement under which they consented to the NYU-Meridian transaction and reduced their maximum distribution under the confirmed chapter 11 plan by 13.33%.

Now pending before the Court are two motions for summary judgment. The first is a Motion for Summary Judgment ("NRAD SJ Mot.") (Dkt. No. 46) filed by NRAD seeking judgment in its favor on all five claims for relief asserted in the Complaint predicated on its central argument that proceeds received from the MLMIC demutualization are not property of the estate subject to distribution under its confirmed chapter 11 plan. The second is a Motion for Summary Judgment ("Pl. SJ Mot.") (Dkt. No. 47) filed by Plaintiffs seeking judgment in their favor on the first claim for relief in the Complaint determining that the proceeds derived from the MLMIC demutualization are property of the estate and must be distributed in accordance with NRAD's confirmed chapter 11 plan. Thus, the threshold question, and the heart of this dispute, is whether the demutualization proceeds constitute property of the estate.

The Court carefully reviewed the parties' submissions and heard oral argument on the motions. For the reasons set forth below, the Court grants Plaintiffs' motion and denies NRAD's motion as to the first claim for relief. The Court also denies NRAD's motion as to the second, third, fourth, and fifth claims for relief.

JURISDICTION

The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b) and the Standing Order of Reference of the United States District Court for the Eastern District of New York, dated August 28, 1986 (Weinstein, C.J.), as amended by Order dated December 5, 2012 (Amon, C.J.) entered in accordance with 28 U.S.C. § 157(a).

BACKGROUND¹

I. NRAD'S PREPETITION OPERATIONS

Plaintiffs are former shareholders of NRAD and creditors of NRAD's bankruptcy estate. JSF ¶ 1. NRAD was a professional corporation, organized under the laws of the State of New York, that operated a regional radiology imaging medical practice and a regional radiation therapy practice until June 1, 2015. Id. ¶¶ 2-3.

For several years prior to and as of the Petition Date, NRAD was owned by the current shareholders: Robert V. Blake, M.D., Paul D. Cayea, M.D., Paul S. Lang, M.D., Robin Ehrenpreis, M.D., Daniel Benjamin, M.D., Gene Berkovich, M.D. Eric Schnipper, M.D., and Paul Schorr, M.D (collectively, the "Current Shareholders"). Id. ¶ 4. In connection with NRAD's operations, NRAD employed various physicians, including Plaintiffs, Bilha Fish, M.D., Geraldine McGinty, M.D., Joshua Kern, M.D., Kim Podolnick, M.D., Leslie Feld, M.D., Lori Kelly, M.D., and Nina Vincoff, M.D. (collectively, and together with Plaintiffs, the "Former Shareholders"). Id. ¶ 5.

The Former Shareholders tendered their shares in 2013 and 2014. Id. ¶ 6. In return for the tender of their shares, the Former Shareholders received promissory notes (collectively, the "Redemption Notes") under various redemption agreements entered into with NRAD in 2013 and 2014 (collectively, the "Redemption Agreements"), as provided for in the operative Shareholder's Agreement. Id. ¶ 7. On November 5, 2014, one of the Former Shareholders, Nina S. Vincoff, M.D. ("Vincoff"), commenced an action in New York State Supreme Court, Nassau County, seeking payment in full on her Redemption Note. Id. ¶ 9; Vincoff v. NRAD, Index No. 605872/2014 (the "First Vincoff Action").

On November 12, 2014, NRAD commenced an action in state court against the Former Shareholders, whereby NRAD sought to characterize the Redemption Notes as distributions to the Former Shareholders and to, accordingly, obtain a determination that the Redemption Notes payments were not required because NRAD was either insolvent or would be rendered insolvent thereby. JSF ¶ 10; NRAD v. David Ebling, M.D., et al., Index No. 606028/2014 (the "NRAD Redemption Notes Action"). On February 9, 2015, Vincoff obtained a judgment against NRAD in the First Vincoff Action, in the amount of $318,994.09, which judgment was filed and entered on May 5, 2015 (the "Vincoff Judgment"). JSF ¶ 11. On April 10, 2015, NRAD and Vincoff entered into a security agreement (the "Vincoff Security Agreement"), whereby NRAD granted Vincoff a security interest in, and lien on, substantially all of NRAD's assets. Id. ¶ 12.

On or about June 1, 2015, NRAD transferred its assets to Blue Dot Holdings, LLC ("Blue Dot"). Id. ¶ 13. Thereafter, Blue Dot transferred those assets to Meridian Imaging Group, LLC ("Meridian"). Id. ¶ 14. Meridian was formed as a management services organization, 52.8775% of which was owned by Blue Dot; the remaining percentage was owned by an unrelated company. Id. ¶ 15.

On June 16, 2015, Vincoff commenced an action in state court against NRAD, Meridian, and Blue Dot, whereby Vincoff brought claims for, inter alia, replevin against Meridian and breach of the Vincoff Security Agreement and sought avoidance of NRAD's transfer of its assets to Blue Dot and Meridian. Id. ¶ 16; Vincoff v. Meridian, Blue Dot, and NRAD, Index No. 603887/2015 (the "Second Vincoff Action").

II. NRAD'S CHAPTER 11 CASE

On July 7, 2015 (the "Petition Date"), NRAD filed a petition for relief under chapter 11 of the Bankruptcy Code. JSF ¶ 17. NRAD commenced the chapter 11 case to restructure its obligations, including those debts owed to the Former Shareholders. Id. ¶ 8. On April 7, 2017, NRAD filed its Second Amended Chapter 11 Plan (the "Bankruptcy Plan") and Disclosure Statement (the "Disclosure Statement"). Id. ¶ 26. On March 7, 2017, NRAD, the Official Committee of Unsecured Creditors, the Current Shareholders, and the Former Shareholders entered into the Plan Support Agreement, agreeing to the treatment of their claims in the Bankruptcy Proceeding. Id. ¶ 28. On June 6, 2017, the Court entered an order confirming the Bankruptcy Plan (the "Confirmation Order"). Id. ¶ 33. During NRAD's bankruptcy proceedings, NRAD did not reference MLMIC (as defined infra Section IV) or the MLMIC...