The trustee overseeing the bankruptcy of collapsed Richmond blood-testing firm Health Diagnostic Laboratory has its eye on another big pot of potential cash for creditors.
Richard Arrowsmith, who has been working to untangle the remnants of HDL for more than two years, is fighting to impose a constructive trust that would put a freeze on money the federal government hopes to collect from former sales executives that peddled the company’s blood tests.
Arrowsmith on March 9 filed a complaint in Richmond federal court to put a safety net around upwards of $220 million it claims was paid by HDL to BlueWave Healthcare Consultants, an Alabama-based third-party sales company.
The complaint is targeting money that was allegedly passed down to BlueWave executives Floyd Calhoun Dent III and Robert Bradford Johnson, along with 17 entities tied to them or family members.
The case also mainly is aimed at preventing the federal government from collecting on judgements it won earlier this year in South Carolina federal court after a two-week jury trial found that Dent and Johnson had a hand in steering HDL toward defrauding Medicare and Tricare with the alleged use of kickbacks to doctors.
BlueWave had been a defendant in the case but was found not liable.
HDL co-founder and former CEO Tonya Mallory was also a defendant in that suit and was found liable along with Dent and Johnson. Mallory is not a party to Arrowsmith’s latest complaint.
That trial found the actions of Dent, Johnson and Mallory caused the 35,000 false claims to be submitted to government healthcare programs, resulting in about $17 million in damages. That amount is required by law to be tripled, resulting in the $50 million total spread between the three defendants, plus tens of millions of dollars more in potential civil penalties.
While none of that money has been paid as the verdict is still in dispute, Arrowsmith’s complaint argues that at least some of the funds that would be used to pay the judgements to the government were from allegedly fraudulent transfers paid to Dent and Johnson by HDL and should therefore be property of the bankruptcy estate.
“It is essential that those assets which are the fruit of the nefarious scheme perpetrated by HDL and the BlueWave defendants be shielded and held in constructive trust for the benefit of the creditors of the debtors’ estates,” the complaint argues.
The trustee’s complaint is asking for a range from $130.6 million to $220.3 million, the higher end being the amount allegedly paid to BlueWave by HDL over nearly five years up to 2015.
The complaint argues that the government would still get a piece in the end as it already has a claim as a creditor in the HDL case for $94 million.
Attorneys for Dent, Johnson and Mallory are disputing the South Carolina jury verdict, either to have it overturned, win a new trial or clear the way for an appeal.
The HDL trustee is represented by Cullen Speckhart of law firm Wolcott Rivers Gates and Richard Kanowitz of the Cooley law firm.
Dent and Johnson are represented by South Carolina attorneys from the Joe Griffith Law Firm and Barnwell Whaley Patterson & Helms.
HDL fell into bankruptcy in 2015 in the face of controversy surrounding the government kickback investigation. The bulk of its assets were sold to a competitor.
More than two years later, creditors with claims of $2.1 billion wait to see what assets can be recovered. As of the end of 2017, the bankruptcy estate reported about $33 million in cash on the books.