Circulatory Centers of America to Get Chapter 11 Trustee

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By Diane Davis

A Chapter 11 trustee will be appointed in a bankruptcy case because the debtors’ current management team is acting in its own self interests to satisfy government claims against it, the U.S. Bankruptcy Court for the Western District of Pennsylvania held.

Fifth Third Bank has shown cause existed for the appointment of a trustee because it is in the best interests of the debtors’ creditors, Judge Gregory L. Taddonio wrote Dec. 15.

Although a Chapter 11 debtor usually acts as the trustee of his own bankruptcy estate, the U.S. Trustee or a party in interest may ask the court to appoint a trustee to manage the estate instead, the court said.

Because there is a strong presumption against replacing a debtor with a court-appointed trustee, Fifth Third Bank must show either cause to appoint the trustee such as fraud, dishonesty, incompetence, or gross mismanagement, or that it would be in the best interests of creditors, the court said.

Courts applying Bankruptcy Code Section 1104(a)(2) decide the issue on a case-by-case basis, and tend to rule in favor of appointment when the principals elevate their own interests above those of the debtor to the point it causes significant damage to the bankruptcy estate, the court said.

Circulatory Centers of America, LLC is a group of four entities that provides specialized treatment for varicose veins. Although only three of their entities filed Chapter 11, their New York office hasn’t filed but the business is run as one enterprise.

The debtors are in the midst of negotiating a sale of substantially all of their assets.

Fifth Third Bank has a $3.3 million judgment against the debtors, and the Department of Justice has a $38 million claim against the debtors for alleged false claims in health care.

The bank wanted a trustee appointed because it said the current management team is allocating too much money from the proposed sale for the sole purpose of satisfying the government’s claims and eliminating any personal liability the officers may have.

Circulatory Centers offered no credible business justification for their treatment of the funds, the court said. It can only be concluded that the debtors’ principals are “advancing their own personal interests at the expense of creditors in the bankruptcy estate,” the court said.

Kirk B. Burkley and Kerri Coriston Sturm represented Fifth Third Bank; Robert O Lampl and David L. Fuchs represented Circulatory Centers of America, LLC.

The case is Fifth Third Bank v. Circulatory Ctrs. of Am. , 2017 BL 449926, Bankr. W.D. Pa., No. 17-22572-GLT, 12/15/17 .

To contact the reporter on this story: Diane Davis in Washington at ddavis@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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