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National Medical Imaging, LLC v. U.S. Bank, N.A.

United States District Court, E.D. Pennsylvania

August 28, 2019

NATIONAL MEDICAL IMAGING, LLC, et al., Plaintiffs,
v.
U.S. BANK, N.A., et al., Defendants.

          MEMORANDUM OPINION

          RUFE, J.

         This case is one chapter in the protracted litigation following the aftermath of a complex securitization transaction, and the Court writes primarily for the parties, who are familiar with the background. Plaintiffs National Medical Imaging, LLC and National Medical Imaging Holding Company, LLC (collectively “NMI”) allege that Defendants[1] filed involuntary bankruptcy petitions against them in bad faith in violation of 11 U.S.C. § 303. Defendants have filed motions for summary judgment, and for the reasons that follow, these motions will be granted.

         I.BACKGROUND [2]

         NMI was a diagnostic imaging company headquartered in Philadelphia that provided management, billing, and collection services for diagnostic imaging centers. NMI was affiliated with certain limited partnerships (the “NMI LPs”) that operated diagnostic imaging centers. In 2000, the NMI LPs entered into various master leases and equipment schedules (“Master Leases”) with DVI Financial Services to finance the purchase of equipment for use at the centers. These Master Leases were secured by a limited guaranty executed by Maury Rosenberg, the managing member of NMI, and an additional guaranty by NMI.

         DVI Financial then transferred some of the Master Leases to DVI Funding, LLC, which held them directly, and the remainder were securitized and assigned to the DVI Receivables corporations. At the same time, DVI Funding entered into indentures with U.S. Bank, acting as trustee of the transaction, under which notes were issued to investors with the Master Leases serving as collateral. DVI Financial was appointed as servicer for the trustee, U.S. Bank, but after filing for bankruptcy in 2003, DVI Financial transferred its rights as servicer to Lyon Financial Services, a subsidiary of U.S. Bank.[3]

         In 2003, U.S. Bank declared the Master Leases to be in default and filed multiple suits in the Court of Common Pleas of Bucks County, Pennsylvania, against NMI. While those actions were pending, several DVI entities filed involuntary bankruptcy petitions against NMI, that resulted in a Settlement Agreement in August of 2005, by which the petitions were dismissed and U.S. Bank restructured the repayment obligations; in return, Rosenberg and NMI executed new guaranties of repayment and confessions of judgment in favor of U.S. Bank. On March 2, 2007, DVI Funding sold its interest in the Master Leases to Ashland Funding, LLC.

         In July 2008, U.S. Bank filed a confession of judgment against NMI and Rosenberg in Bucks County for defaulting on their repayment obligations under the August 2005 Settlement Agreement. This action was stayed on August 29, 2008, [4] and on November 7, 2008, despite having no remaining interest in the Master Leases, DVI Funding and five other DVI entities filed involuntary bankruptcy petitions against NMI and Rosenberg in the United States Bankruptcy Court for the Eastern District of Pennsylvania.

         The proceedings against Maury Rosenberg were ultimately transferred to the Southern District of Florida, where he resides, while the bankruptcy proceedings against NMI remained in this district.[5] The Florida Bankruptcy Court dismissed the involuntary bankruptcy petition against Rosenberg on August 21, 2009 (Rosenberg I), [6] a decision which was affirmed by both the United States District Court Southern District of Florida and the Eleventh Circuit.

         Following the dismissal of the bankruptcy proceedings in Florida, the Bankruptcy Court for the Eastern District of Pennsylvania dismissed the involuntary bankruptcy petitions against NMI on the basis of collateral estoppel; specifically, based on Rosenberg I's holdings that (1) the DVI entities and Ashland were not real parties in interest and (2) U.S. Bank was the only creditor because the Settlement Agreement constituted a novation.[7] The decision was affirmed by both this Court (“Rosenberg II”)[8] as well as the Third Circuit (“Rosenberg III”).[9]

         Prior to the filing of the November 2008, involuntary bankruptcy petitions against it, NMI was experiencing financial difficulties that it claimed were due in part to the Deficit Reduction Act (“DRA”), which impacted the billing of medical imaging services.[10] In light of these difficulties, NMI began discussions with U.S. Bank in 2008, in an effort to restructure its outstanding debt. The parties have offered conflicting characterizations of their unsuccessful attempts to negotiate such an agreement. NMI contends that U.S. Bank “had no interest in negotiating a restructuring of NMI's debt or working with NMI to find a realistic solution, ”[11]while Defendants assert that U.S. Bank “engaged in a dialogue with NMI for several months. But NMI refused to provide center-by-center financials, made exceedingly low offers … and, when those offers were not accepted, chose the nuclear option-closing the centers.”[12]

         In October 2008, Rosenberg decided to close NMI's Maryland and Illinois locations, and notified Jane Fox, who was then the Director of Operations for a subsidiary of U.S. Bank, that NMI would surrender the equipment leased from U.S. Bank located in the Pennsylvania imaging centers.[13] By November of 2009, NMI closed all of its locations and effectively became defunct. The parties disagree as to whether the involuntary bankruptcy petitions were a proximate cause of the business's ultimate demise.

         NMI, Maury Rosenberg, and various related entities have filed a series of lawsuits in this Court and in Florida, seeking compensation for the harm they allege to have suffered as a result of the involuntary bankruptcy petitions purportedly filed in bad faith. Maury Rosenberg brought one such claim for sanctions under § 303(i)(2) in the Florida Bankruptcy Court against the petitioners of the involuntary bankruptcy petitions. A jury trial was ultimately held on these claims, resulting in a verdict in favor of Maury Rosenberg.[14] Additionally, Sara Rosenberg, the Douglas Rosenberg Trust, and other entities related to Maury Rosenberg and NMI filed suit for tortious interference with contract and business relationships against the petitioners, based on the same facts, in the Southern District of Florida, which was transferred to this Court.[15]

         In this case brought under § 303(i)(2), [16] NMI seeks compensatory and punitive damages for the alleged harm to NMI arising from the involuntary bankruptcy petitions. NMI contends that Defendants filed the petitions in bad faith and as a result:

[T]he Plaintiffs' valuable businesses were destroyed because, among other reasons, the commencement and continued prosecution of the involuntary bankruptcy cases: (1) caused Plaintiffs to lose preferred provider status with major insurers; (2) caused physicians to lose confidence in the Plaintiffs' stability and to divert their patients to other providers; (3) caused lenders to cutoff the Plaintiffs' access to receivables, thereby creating a liquidity crisis; (4) caused vendors to put the companies on a COD basis, thereby further eroding cash and liquidity; and (5) destroyed Plaintiffs' reputations in the community, and torpedoed planned acquisitions and expansion.[17]

         All Defendants have now moved for summary judgment on NMI's claim under § 303(i)(2). Defendant U.S. Bank has also moved for default judgment on its counterclaim, in which it seeks to setoff the amount due to it under a state court judgment it obtained against Plaintiffs in Bucks County, either in full or partial satisfaction of any judgment NMI obtains in this action.[18]

         II. LEGAL STANDARD

         A court will award summary judgment on a claim or part of a claim where there is “no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”[19] A fact is “material” if resolving the dispute over the fact “might affect the outcome of the suit under the governing [substantive] law.”[20] A dispute is “genuine” if “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.”[21]

         In evaluating a summary judgment motion, a court “must view the facts in the light most favorable to the non-moving party, ” and make every reasonable inference in that party's favor.[22]Further, a court may not weigh the evidence or make credibility determinations.[23] Nevertheless, the party opposing summary judgment must support each essential element of the opposition with concrete evidence in the record.[24] “If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted.”[25] This requirement upholds the “underlying purpose of summary judgment [which] is to avoid a pointless trial in cases where it is unnecessary and would only cause delay and expense.”[26] Therefore, if, after making all reasonable inferences in favor of the non-moving party, the court determines that there is no genuine dispute as to any material fact, summary judgment is appropriate.[27]

         III. DISCUSSION

         Where an involuntary bankruptcy petition is dismissed other than on consent of all petitioners and the debtor, a court may grant judgment “against any petitioner that filed the petition in bad faith, for - (A) any damages proximately caused by such filing; or (B) punitive damages.”[28] In moving for summary judgment, Defendants contend that there is no genuine issue of material fact concerning bad faith, causation, or punitive damages.

         As discussed below, the record makes clear that neither compensatory damages nor punitive damages are warranted in this case. Specifically, the record establishes that NMI's financial difficulties were caused by factors independent of the involuntary bankruptcy petitions, and thus there is no genuine dispute of material fact on the issue of proximate cause. There are limited indicia of bad faith, which preclude any determination on that issue as a matter of law, such as insufficient pre-filing investigation into the facts and law. Yet, the evidence relating to bad faith does not rise to a level that would merit punitive damages, especially considering NMI's severe financial distress.

         1. Compensatory Damages

         Where a petitioner files an involuntary bankruptcy petition in bad faith, the debtor can recover for “any damages proximately caused by such filing.”[29] Such damages may not be based on speculation or mere conjecture.[30] In this case, Defendants argue that any purported injuries caused by the involuntary petitions are purely speculative, especially in light of NMI's “dire financial straits, ”[31] and as NMI was closing its centers before the involuntary petitions were even filed. The Court agrees.

         NMI concedes that it had been suffering losses prior to the involuntary bankruptcy petitions due to the DRA, [32] and evidence in the record sheds light on the severity of its losses. In a letter NMI sent to U.S. Bank, NMI asserted that the DRA resulted in a “significant reduction” in reimbursements, reductions in the number of patients that could be seen in outpatient centers, a decline of about 16% in total scan volume from 2005 to 2007, an overall company volume decline of about 19% when comparing January 2007 to January 2008, and a “severe reduction in cash collections.”[33] These changes “brought about disastrous results” for NMI.[34] According to Plaintiffs, Maury Rosenberg closed all of the NMI's Maryland and Illinois centers in October of 2008, “as a cost-cutting measure.”[35]

         The record also includes substantial evidence that, in the face of the obstacles posed by the DRA and before the involuntary bankruptcy petitions were filed, Rosenberg had decided to close all of the NMI centers. As early as April 9, 2008, Rosenberg wrote in an email that “[m]ost outpatient centers are in the process of closing their doors and it is my opinion that in the very near term will stop to exist, ” and NMI's efforts to cut costs “are not sufficient for [NMI] to survive” in the face of the “draconian changes brought about by the DRA.”[36] In this email, Rosenberg blamed “the nonprofit and government authorities” for this financial hardship.[37]Rosenberg also expressed his intention to close NMI in numerous pre-petition emails to U.S. Bank representatives. Jane Fox asserts that Maury Rosenberg informed her that he was closing imaging centers in October 2008.[38] On November 3, 2008, Rosenberg, apparently referencing a prior conversation concerning the closing of all NMI centers, wrote to Bob Brier, U.S. Bank's business consultant at the time, that “as previously discussed, we are in the process of closing all of the centers [and] this process should be completed no later than 12/15/08.”[39] That same day, Maury Rosenberg told a potential purchaser that NMI “expects to close all of the [Pennsylvania] centers prior to Mid-December and is in the process of negotiating real estate lease terminations and will tender the equipment back to the secured lenders.”[40] A few days later, on November 6, 2008, Rosenberg urged Brier to begin picking up equipment at the Pennsylvania sites because various landlords were calling.[41]

         Rosenberg now disputes the veracity of his own statements to Brier and to a potential purchaser, and contends that he made them only out of frustration.[42] He asserts that he intended to keep open several NMI centers, and in support, points to his communications with Sterling National Bank (with which NMI had obtained a line of credit) in which he asserted his intention to keep four to five centers open once the involuntary petition was dismissed.[43] These statements were made after the involuntary petitions were filed, and inconsistencies in Maury Rosenberg's representations to interested parties do not give rise to a genuine dispute of material fact.

         In addition to the evidence that Rosenberg intended to close down NMI's business before the involuntary bankruptcy petitions were filed, the specific injuries that Plaintiffs complain of are not supported by the record.

         1. Purported Loss of Preferred Provider Status and Physicians' Confidence in NMI

         First, NMI alleges that it lost “preferred provider status” and the confidence of referring physicians as a result of the involuntary bankruptcy petitions. Initially, it is not clear that “preferred provider status” even exists in the sense that NMI alleges. According to Ann Marie Iannarelli, NMI's Senior Vice President of Operations, “preferred provider status” is a means by which insurance companies can recommend where a patient should go, and NMI was “at the top of the list if not number one most of the time” based on the “service and quality of work, ” but they got “pushed down on the provider list from number one to midstream” after the involuntary bankruptcy petitions were filed.[44] However, Defendants' expert, David Levin, M.D., has asserted that “there is no such thing as ‘preferred' provider status with the insurers. You either have a contract with the insurer to be part of their approved network or you don't. Once you're approved there is no list of providers who are ‘preferred' on the basis of their financial status.”[45] NMI has not offered evidence or further explanation as to whether companies are essentially rated on these preferred provider listings.[46]

         Additionally, NMI does not offer any statements from physicians to show that they lost confidence in NMI as a result of the involuntary bankruptcy petitions or that they were even aware of the petitions. In fact, Maury Rosenberg admitted that he did not have anything in writing that indicates that any insurance company dropped NMI as a preferred provider because of the involuntary petition.[47] Plaintiffs instead rely on statements of Iannarelli, who testified that it was her belief that physicians stopped referring patients to NMI for fear that it might go out of business and patients would be unable to get their medical records.[48] Yet, Iannarelli admitted that she did not personally discuss the bankruptcy with any of the referring physicians, and based her testimony on this subject on “hubbub talk.”[49] Iannarelli's belief that NMI's reputation deteriorated in the eyes of physicians, as well as her belief that such purported harm was due to the involuntary petitions, as opposed to the financial difficulties NMI was already facing, is too biased and speculative to preclude summary judgment.

         2. Loss of Accounts Receivable to Sterling National Bank

         Rosenberg's allegation that the involuntary bankruptcy petition “irreparably fractured” NMI's relationship with Sterling National Bank (“Sterling”) and caused it to lose its receivables to Sterling is also unsupported by the record. As background, NMI had obtained a line of credit and a term loan from Sterling in 2007, secured by a lien on NMI's accounts receivable. Plaintiffs allege that Sterling found out about the involuntary bankruptcy in March 2009 from a Dunn and Bradstreet search, and issued a letter of default to NMI, citing the involuntary bankruptcy as the first reason for default. According to Plaintiffs, this default ultimately resulted in a forbearance agreement which NMI violated, thus resulting in the loss of the accounts receivable.

         However, the record establishes that NMI was already in default of its loan from Sterling based on NMI's failure to comply with the covenants in their Loan and Security Agreement; namely, violations of the required debt to tangible net worth ratio covenant, the tangible net worth covenant, and the EBITDA covenant.[50] Sterling sent NMI a default letter explaining these violations on August 21, 2008.

         In September 2008, Maury Rosenberg had a meeting with two representatives from Sterling to discuss NMI's large daily overdrafts, many of which ranged from $500, 000 to $800, 000, and “were the result of checks written to the [Douglas Rosenberg] Trust to cover deposits the Trust made on behalf of NMI the day before.”[51] Additionally, Maury Rosenberg told Sterling that he did not have any additional collateral and that the Trust (which owned 99% of NMI) would not provide a guaranty.[52] Sterling informed Maury Rosenberg that NMI would have to “find another source of financing, ” Sterling was unwilling to consider his request for a higher line of credit, and Sterling “wanted the loan to come down in an orderly fashion.”[53] Sterling's former Senior Vice President, Joseph Costanza, asserted that Sterling was “looking to exit its relationship with NMI, ” prior to October of 2008, and that Maury Rosenberg was informed of this intention at the September 2008 meeting.[54]

         Furthermore, the events that followed Sterling's discovery of the involuntary bankruptcy petition, including the creation and subsequent violation of the forbearance agreement, were not driven by the involuntary petitions as Plaintiffs suggest. While Plaintiffs are correct that the second default letter dated March 25, 2009, referenced the involuntary bankruptcy petitions, this letter also noted that NMI failed to notify Sterling about the involuntary bankruptcy petition as required, and that NMI failed to cure the violations listed in the prior default letter from August 21, 2008.[55] Additionally, the evidence shows that NMI breached the forbearance agreement by diverting funds to a non-permitted account at another bank, and by repaying the subordinated Trust debt ahead of Sterling.[56] Plaintiffs have not produced sufficient evidence from which a reasonable jury could conclude that Sterling would not have made the decision it did in the absence of the involuntary bankruptcy petition.

         3. Allegation of Inability to Obtain Additional Credit

         Finally, Plaintiffs' claim that the involuntary bankruptcy petitions caused NMI to lose access to credit lines lacks support in the record. In an April 7, 2008 letter, NMI's counsel wrote that, “[g]iven the state of the industry and the liquidity markets, NMI does not expect additional sources of funding will be available in 2008.”[57] In an April 9, 2008 email, Maury Rosenberg reiterated this comment, and also noted that NMI “does not have the cash flow, or access to additional debt, needed to continue and in most likelihood shortly default on its debt, ” and that its efforts to cut its expenses “are not sufficient for [NMI] to survive” in the face of the “draconian changes brought about by the DRA.”[58] Plaintiffs did not attempt to explain or support this purported injury in their briefing. Indeed, Plaintiffs' brief in opposition to summary judgment rests largely on their argument that involuntary bankruptcy petitions are per se damaging, which is not what the law requires.[59]

         Thus, considering that lack of support in the record for the injuries of which Plaintiffs complain, in combination with the overwhelming evidence that NMI was closing due to forces and decisions independent of the involuntary bankruptcy petitions, there is no genuine dispute of material facts relating to whether Defendants' actions proximately caused injury to NMI.

         2. Punitive Damages

         Punitive damages may be awarded whether or not there is proof of actual damages.[60]“The purposes for assessing punitive damages are to punish the wrongdoer, to deter him from repeating his misdeeds, and to set an example so that others will be dissuaded from engaging in such conduct.”[61] In assessing whether to grant punitive damages, courts consider “the degree and nature of the wrong to the debtor, the intent of the creditors, and any surrounding aggravating or mitigating circumstances.”[62] [T]he most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant's conduct, ”[63] and punitive damages may be appropriate where the defendants' conduct is malicious or vengeful.[64] Punitive damages require more than bad faith, and “are only warranted when the evidence shows that a defendant acted ‘with intentional malice' or that its conduct was ‘particularly egregious.'”[65]

         Here, the Court finds limited indicia of bad faith by Defendants. There is, for example, some evidence that Defendants were negligent and hasty in their filing of the involuntary bankruptcy petition as to NMI. However, Plaintiffs have not produced evidence of maliciousness or the type of egregious conduct that would warrant an award of punitive damages.

         In evaluating whether an involuntary bankruptcy petition was filed in bad faith, the Third Circuit in In re Forever Green Athletic Fields, Inc. adopted a “totality of the circumstances” standard, which is a “fact-intensive review” pursuant to which a court may consider a number of factors, including: whether the creditors satisfied the statutory criteria for filing the petition, whether the creditors made a reasonable inquiry into the relevant facts and law before filing, whether the filing was motivated by ill will or a desire to harass, whether the filing was used to gain a tactical advantage in pending actions, and whether the filing had suspicious timing.[66]

         There is some conflicting evidence as to Defendants' level of diligence in inquiring into the facts and law before filing the involuntary bankruptcy petitions. The petitions were dismissed because Defendants failed to meet the numerosity requirement of § 303(b)(1) once the bankruptcy court determined that the DVI entities were not real parties in interest. In fact, on the petition date, the corporate good standing of the majority of the DVI entities had lapsed and had been administratively dissolved.[67] Fox, Brier, and Pinel admit that they did not do any investigation to determine the number or identity of the potential creditors of NMI, [68] and Pinel admitted that he did not do any investigation prior to the commencement of the involuntary bankruptcies as to the status of the creditors, and that “as it turns out, ” no one did; instead, Pinel “made an assumption” that someone had looked into this.[69] Pinel acknowledged that the filing of this petition was a “fast moving process” that “needed to be done quickly, ”[70] as Maury Rosenberg had represented that NMI, who had been failing to pay its creditors, was on the brink of closing up entirely.[71] Given the extensive evidence that NMI was in serious financial distress, the failure to adequately inquire into the facts and law, although certainly improper, does not rise to the level of maliciousness that would warrant punitive damages.

         There is also conflicting evidence as to Defendants' ultimate goal, or purpose, for filing the petitions, which precludes summary judgment on the issue of bad faith. Pinel, Brier, and Fox have indicated that, in light of what they believed to be the imminent shutdown of NMI, the main purpose in filing the involuntary bankruptcy petitions was to appoint an interim trustee who could continue to operate the businesses.[72] Once the petitions were filed, Defendants never moved to have an interim trustee appointed. Fox asserted that she did not know why the request for an interim trustee was never made.[73] Brier stated that he asked for an interim trustee to be appointed “frequently, ” that he believed that Pinel would “take care of it, ” and that he realized no request had been made “shortly after the filing” of the petitions, because he “was still asking, how [to] get a trustee approved and appointed.”[74] Pinel “disagree[d] with [Brier]'s testimony” on the matter, and asserted that the client, rather than Pinel, decided not to seek the appointment of a trustee[75] once it became apparent that there was no value in continuing the operations and that it would thus be more beneficial to wait for the involuntary petitions to be granted and for a Chapter 7 trustee to be appointed and to focus on orderly disposition of the assets.[76] Again, such evidence suggests, at most, a negligent and hasty approach to the involuntary bankruptcy petitions, but it does not evidence a “wanton disregard for the rights of the parties injured.”[77]

         Finally, there is some evidence in the record that Defendants filed these petitions, not solely in response to the impending closure of the NMI business and NMI's failure to pay its creditors, [78] but in order to gain a tactical advantage in the Bucks County action. One of the factors listed in Forever Green is “suspicious timing, ” and here, the involuntary bankruptcy petitions were filed a little over two months after the execution of the confessed judgment against Rosenberg was stayed in Bucks County, [79] and less than two months after Fox wrote in an email to Brier that he needed to make sure their attorney in the Bucks County action was a “street fighter” who needs to “out file Maurey [sic] and not sit back and let things just go through the court systems.”[80] The involuntary petition was also filed soon after Defendants told Rosenberg that they would not accept anything other than a lump sum payment to satisfy his outstanding debt, and the parties dispute whether Defendants were negotiating a restructuring of the debt in good faith.[81] The Court must “view the underlying facts and all reasonable inferences therefrom in the light most favorable to the party opposing the motion, ”[82] and therefore the Court will not determine, at this stage, whether the Defendants improperly used the involuntary bankruptcy petition as a means to collect a debt.

         Nevertheless, this potentially suspicious timing does not warrant an imposition of punitive damages. It is important to note the full context-this was also the same time that Maury Rosenberg had informed Fox and Brier that he was in the process of closing all of the NMI centers.[83] Upon receipt of this news, Brier informed Fox in an October 28, 2008 email that “an involuntary bankruptcy … now seems to be our best choice, ” given Maury Rosenberg's indication that the NMI centers will be closed “in a matter of months if not sooner, ” and that Maury Rosenberg “declined” to meet with a potential inquirer and “said it was too late, that he was closing all the centers now and that NMI had nothing to sell.”[84] Thus, the Defendants may have “had an improper motive, albeit not necessarily based on ill will or malice, ”[85] and given the context in which these involuntary bankruptcy petitions were improperly filed-NMI's uncontested dire financial situation and that Maury Rosenberg had repeatedly threatened to abruptly cease operations-and with the absence of any evidence of maliciousness or ill will, the Court does not find that the policy surrounding § 303(i)(2) would be aided by awarding punitive damages.[86]

         3. Additional Issues Raised by Various Defendants

         Some Defendants raised additional arguments in support of summary judgment. Although the Court has granted Defendants' motions based on Plaintiffs' failure to meet the elements of 11 U.S.C. § 303(i)(2), the Court will address these alternative arguments briefly in the interest of creating a complete record.

         i. ...


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