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holding that "[debtor's] liability to the United States . . . will be determined on the bases of common law fraud and the False Claims Act," and is, therefore, not core
Summary of this case from United States v. McOuatOpinion
No. 97-CV-4949.
March 13, 1998
ZACHARY W. CARTER, Esq., United States Attorney, Eastern District of New York, Linda M. Marion, Esq., Assistant U.S. Attorney, Brooklyn, New York, for Plaintiff.
EDWARD WEISS, Pro Se New York, New York, for Defendant.
MEMORANDUM AND ORDER
Plaintiff, United States, filed an adversary proceeding in the Bankruptcy Court (the "adversary proceeding") objecting to the dischargeability of an alleged debt arising from Medicaid overpayments to BR Ambulance Service, Inc., a/k/a American Ambulance Oxygen Services ("BR Ambulance"), a company owned and operated by defendant-debtor Edward Weiss ("Weiss"). Currently before the Court is plaintiff's motion for an order withdrawing the adversary proceeding from the bankruptcy court pursuant to 28 U.S.C. § 157(d). Weiss has not submitted papers in response to plaintiff's motion. For the reasons that follow, plaintiff's motion to withdraw is denied.
At the time that this motion was filed, up to and including the time permitted for a response, Weiss was represented by Glenn Ripa, Esq. On March 4, 1998, Magistrate Judge Steven M. Gold granted Ripa's application to be relieved, and Weiss has not retained new counsel at this time.
BACKGROUND
Weiss is the owner and operator of BR Ambulance, a corporation engaged in the business of transporting patients to and from dialysis centers, clinics, doctors' offices, and hospitals. BR Ambulance supplied ambulance services pursuant to Part B of Title XVIII of the Social Security Act (hereinafter referred to as "Medicare"), 42 U.S.C. §§ 1395- 1395ccc, which is a voluntary subscription program of supplemental medical insurance covering, in general, eighty percent of the reasonable charges for certain physician services, ambulance services, x-rays, laboratory tests and medical supplies. 42 U.S.C. §§ 1395j- 1395w-4. Pursuant to the Medicare program, BR Ambulance made requests to and accepted payments from Empire Blue Cross Blue Shield ("Empire"), a Medicare carrier in the State of New York, for ambulance services allegedly provided to Medicare recipients. These payments came from federal funds of the United States.An investigation conducted by the United States Department of Health and Human Services ("HHS"), the Office of the Inspector General, and the Medicare Fraud Unit of Empire produced evidence that BR Ambulance had committed acts of fraud and/or willful misrepresentation in improperly billing Medicare for services allegedly provided by BR Ambulance from 1990 through 1994. This investigation revealed that BR Ambulance: (1) knowingly submitted claims for ambulance transportation that was not medically necessary and, therefore, not covered by Medicare; (2) knowingly falsified records to justify ambulance transportation when such transportation was not medically necessary; (3) knowingly falsified records by changing the destination of ambulance services provided when the actual destination was not a facility approved by Medicare for transportation by ambulance; (4) knowingly submitted false claims for ambulance transportation services when patients were actually transported by ambulette, which is not covered by Medicare; (5) knowingly submitted claims for ambulance transportation to and from dialysis centers, despite notice that such transportation is not covered by Medicare; (6) knowingly billed Medicare for services that were never provided; and (7) knowingly transported several passengers in one ambulance and billed Medicare for individual ambulance rides.
As a result of these revelations, an information was filed against Weiss in the district court for the Eastern District of New York charging him with making and causing to be made false claims against the United States, in violation of 18 U.S.C. § 287, specifically based upon the allegation that Weiss made and caused to be made claims for Medicare reimbursement for transportation by ambulance knowing that such claims were false in that ambulettes, not ambulances, were used. Weiss pled guilty to the information before this Court on August 22, 1996.
In February of 1996, Weiss filed a voluntary petition for bankruptcy, seeking relief pursuant to Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 301 et seq. In January of 1997, HHS filed a proof of claim in Weiss' bankruptcy proceeding in the amount of $17,081,055.81, seeking to recover from Weiss for the Medicare overpayments made to BR Ambulance based on its false and fraudulent claims. In March of 1997, the United States filed a complaint with the bankruptcy court objecting to the dischargeability of the debt owed by Weiss to HHS and asserting claims for common law fraud and violations of the False Claims Act, 31 U.S.C. § 3729. Specifically, the complaint charges, inter alia, that: (1) Weiss, as owner and operator of BR Ambulance, is liable for repayment of the amounts of which Medicare was defrauded; (2) BR Ambulance's corporate veil should be pierced because Weiss used the corporate form to achieve fraud; and (3) Weiss made or caused to be made the representations to Empire, knowing they were false, and intended Empire and the United States to rely on them in paying the claims submitted by BR Ambulance. The United States identified its complaint as a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(I). In his answer, Weiss, inter alia, denied liability to the extent claimed by the United States, claimed that any loss suffered by the United States is the liability of BR Ambulance, not of Weiss individually, and claimed that any loss suffered by the United States with respect to its claims was not due to fraud or intentional misconduct, and thus was dischargeable in bankruptcy.
The United States now moves to have the reference of this adversary proceeding to the bankruptcy court withdrawn, alleging that the adversary proceeding is a "non-core" proceeding and that the interests of judicial economy would be best served by having this action proceed in the District Court.
DISCUSSION
28 U.S.C. § 157(d) provides, in pertinent part, that a "district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown." The statute does not define "cause." However, the Second Circuit, in Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095 (2d Cir. 1993), stated a two-step procedure that a district court should follow in determining whether to withdraw the reference. Id. at 1101. First, the court should "evaluate whether the claim is core or non-core." Id. Second, the court "should weigh questions of efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors." Id.
Section 157(d) also provides that a "district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires considerations of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce." This mandatory withdrawal language "has been construed narrowly," and "is reserved for cases where substantial and material consideration of non-Bankruptcy Code federal statutes is necessary for the resolution of the proceeding." Shugrue v. Air Line Pilots Ass'n, Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 995 (2d Cir. 1990) (citations omitted); see Houbigant, Inc. v. ACB Mercantile, Inc. (In re Houbigant, Inc.), 185 B.R. 680, 683 (S.D.N.Y. 1995). Plaintiff has not moved to withdraw based on the mandatory withdrawal language of the statute. Since this case requires the bankruptcy court to engage in "simple application of federal [and state] laws apart from the bankruptcy statutes," City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir. 1991), mandatory withdrawal is not indicated in this adversary proceeding.
A. Core vs. Non-core Proceedings
The determination of whether a proceeding is core or non-core is significant because it determines the scope of the bankruptcy court's authority. See Hirsch v. London S.S. Owners' Mut. Life Ins. Ass'n Ltd. (In re Seatrain Lines, Inc.), 198 B.R. 45, 50 (S.D.N.Y. 1996). First, a bankruptcy judge may enter orders and judgments in core proceedings; however, in a non-core proceeding, a bankruptcy judge submits proposed findings of fact and conclusions of law to the district court which then enters any final order or judgment after a de novo review of any matters objected to by a party. 28 U.S.C. § 157(b)(1), (c)(1). Second, a bankruptcy court may conduct a jury trial for core proceedings but not for non-core proceedings. Orion Pictures, 4 F.3d at 1101.
Non-core proceedings "`involve disputes over rights that . . . have little or no relation to the Bankruptcy Code, do not arise under the federal bankruptcy law and would exist in the absence of a bankruptcy case.'" Wechsler v. Squadron, Ellenoff, Plesent, Sheinfeld L.L.P., 201 B.R. 635, 639 (S.D.N.Y. 1996) (quoting J. Baranello Sons, Inc. v. Baharestani (In re J. Baranello Sons, Inc.), 149 B.R. 19, 24 (Bankr. E.D.N.Y. 1992)). On the other hand, a proceeding is a core proceeding "`if it invokes a substantive right provided by title 11 or if it is a proceeding that, by nature, could arise only in the context of a bankruptcy case.'" Houbigant, 185 B.R. 680, 685 (S.D.N.Y. 1995) (quoting In re McCrory Corp. v. 99 Cents Only Stores, 160 B.R. 502, 506 (S.D.N.Y. 1993)). Section 157(b)(2) provides 15 examples of core proceedings, although this list is not exhaustive. 28 U.S.C. § 157(b)(2). Core proceedings include "determinations as to the dischargeability of particular debts," 28 U.S.C. § 157(b)(2)(I), and "objections to discharges," 28 U.S.C. § 157(b)(2)(J).
"The relevant inquiry [in making the core/non-core determination] is whether the nature of th[e] adversary proceeding, rather than the state or federal basis for the claim, falls within the core of federal bankruptcy power." Gulf States Exploration Co. v. Manville Forest Products Corp. (In re Manville Forest Products Corp.), 896 F.2d 1384, 1389 (2d Cir. 1990) (citing In re Wood, 825 F.2d 90, 97 (5th Cir. 1987); In re Arnold Print Works, Inc., 815 F.2d 165, 169 (1st Cir. 1987)); see Caldor Corp. v. S Plaza Associates, L.P. (In re Caldor, Inc.), ___ B.R. ___, 1998 WL 37978, at *4 (Bankr. S.D.N.Y. Jan. 30, 1998). Thus, the Court must determine whether the United States's complaint objecting to dischargeability of the debt owed by Weiss to HHS falls within the core of federal bankruptcy power.
As mentioned above, "determinations as to the dischargeability of particular debts," 28 U.S.C. § 157(b)(2)(I), and "objections to discharges," 28 U.S.C. § 157(b)(2)(J), are core proceedings. However, the adversary proceeding involves not only a determination of dischargeability of a debt, but also a determination of Weiss' liability to the United States for the alleged Medicare fraud. Weiss' liability does not "arise under the federal bankruptcy law," Weschler, 201 B.R. at 639; rather, this issue will be determined on the basis of common law fraud and the False Claims Act, 31 U.S.C. § 3729 et seq. Plaintiff clearly could have brought an action in district court to determine Weiss' liability regardless of whether Weiss had filed for bankruptcy. Thus, the adversary proceeding, to the extent that it seeks to determine Weiss' liability for the alleged Medicare fraud, is a non-core proceeding.
B. Other Considerations
This Court's determination that the adversary proceeding is non-core "is not wholly determinative. . . . Rather, [after making] the core/non-core determination, [the Court] should weigh questions of judicial resources, delay and costs to the parties, the uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors." Houbigant, 185 B.R. at 686; see Keene Corp. v. Williams Bailey Wesner, L.L.P. (In re Keene Corp), 182 B.R. 379, 383 (S.D.N.Y. 1995). Thus, the mere fact that the adversary proceeding is non-core does not require the Court to withdraw the adversary proceeding from the bankruptcy court. See, e.g., Orion Pictures, 4 F.3d at 1102 (stating that if a case is non-core, a district court "might conclude that the case at that time is best left in the bankruptcy court" based upon a consideration of these other factors."); Hunnicutt Co. v. TJX Companies, Inc. (In re Ames Dep't Stores, Inc.), 190 B.R. 157, 162-64 (S.D.N.Y. 1995) (finding that although adversary proceeding was non-core, none of the factors weighed in favor of withdrawal); In re Rockefeller Ctr. Properties v. Lindy's Operating, Inc., 1995 WL 611183, at *3 (S.D.N.Y. Oct. 17, 1995) (finding that adversary proceeding was non-core, but denying motion to withdraw).
None of these factors weigh in favor of withdrawing the United States' adversary proceeding from the bankruptcy court. First, the complaint and answer indicate that neither party has requested a jury trial. Pursuant to Orion, bankruptcy courts cannot conduct jury trials for non-core proceedings. 4 F.3d at 1101. However, since neither party has requested a jury trial, this limitation on the bankruptcy court's power does not weigh in favor of withdrawal. Even if either party had requested a jury trial, because the adversary proceeding is in its initial stages withdrawal would not be warranted at this time. See Kenai Corp. v. National Union Fire Ins. Co. (In re Kenai Corp.), 136 B.R. 59, 61-62 (S.D.N.Y. 1992) ("A rule that would require a district court to withdraw a reference simply because a party is entitled to a jury trial, regardless of how far along toward trial a case may be, runs counter to the policy favoring judicial economy that underlies the statutory scheme governing the relationship between the district courts and bankruptcy courts."); see also Orion Pictures, 4 F.3d at 1102; Rockefeller Ctr. Properties, 1995 WL 611183, at *2.
Second, withdrawing the proceeding would not promote judicial economy. Plaintiff argues that because any determination made by the bankruptcy court in this non-core proceeding would be subject to de novo review, withdrawal of the proceeding would avoid unnecessary costs. However, although this factor "weighs in favor of the District Court's withdrawal of the reference," Weschler, 201 B.R. at 640, the argument that entitlement to de novo review, without more, indicates that withdrawal best serves judicial economy "would prevent any non-core matter from ever being referred to the bankruptcy court." Hunnicutt, 190 B.R. at 163.
Plaintiff also contends that judicial economy would best be served by having this Court hear the issues raised in this adversary proceeding because this Court handled the related criminal matter in which Weiss entered a guilty plea. However, Weiss' guilty plea and this Court's sentencing of Weiss in September of 1997 closed the criminal matter. The Court did not expend an excessive amount of judicial resources in resolving that matter. Unlike Weschler, where the district court was "intimately familiar with the facts underlying [the] case" because the proceeding in bankruptcy court arose from the same set of facts as a civil action before the district court, this Court's involvement in Weiss' criminal matter only involved a guilty plea to one of the numerous allegations raised by the United States in this adversary proceeding. Weschler, 201 B.R. at 640. Therefore, although this Court is familiar with the related criminal matter, this familiarity does not lead to the conclusion that the most efficient use of judicial resources would be to withdraw this adversary proceeding.
In fact, judicial economy is better promoted by not withdrawing the proceeding. Withdrawing the proceeding would require two proceedings, one in this Court to determine Weiss' liability, and the other in the bankruptcy court to determine dischargeability of that debt. However, by permitting this case to go forward in bankruptcy court, that court can determine both Weiss' liability to the United States and the dischargeability of that liability in one proceeding. It is entirely possible that no objections to the bankruptcy court's findings of fact and conclusions of law with respect to Weiss' liability will be filed, in which case, this Court may enter a final order or judgment after consideration of these findings and conclusions without the need for a second proceeding. The opportunity to limit this case to one proceeding best serves judicial economy.
Finally, none of the other factors that this Court must consider weigh in favor of withdrawing the adversary proceeding. Neither uniformity of bankruptcy administration, forum shopping, nor delay and costs to the parties is affected by permitting the bankruptcy court to determine Weiss' liability.