National Medical Imaging LLC v. ( 2020 )


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  •                                         NOT PRECEDENTIAL
    UNITED STATES COURT OF APPEALS
    FOR THE THIRD CIRCUIT
    _____________
    Nos. 19-3057, 19-3058, 19-3059, 19-3254, and 19-3255
    _____________
    In re: NATIONAL MEDICAL IMAGING, LLC;
    NATIONAL MEDICAL IMAGING HOLDING COMPANY, LLC,
    Debtors
    NATIONAL MEDICIAL IMAGING, LLC;
    NATIONAL MEDICAL IMAGING HOLDING COMPANY, LLC,
    Appellants in 19-3057, 19-3058 and 19-3059
    v.
    U.S. BANK, N.A.; LYON FINANCIAL SERVICES, INC.,
    d/b/a U.S. Bank Portfolio Services; DVI RECEIVABLES XIV, LLC;
    DVI RECEIVABLES XVI, LLC; DVI RECEIVABLES XVII LLC;
    DVI RECEIVABLES XVIII, LLC; DVI RECEIVABLES, XIX LLC;
    DVI FUNDING, LLC; ASHLAND FUNDING, LLC; JANE FOX
    Ashland Funding, LLC,
    Appellant in 19-3254
    U.S. Bank, N.A.; Lyon Financial Services, Inc.;
    DVI Receivables XIV, LLC; DVI Receivables XVI, LLC;
    DVI Receivables XVII, LLC; DVI Receivables XVIII, LLC ;
    DVI Receivables XIX, LLC; DVI Funding, LLC; Jane Fox,
    Appellants in 19-3255
    _______________
    On Appeal from the United States District Court
    for the Eastern District of Pennsylvania
    (D.C. Nos. 2-15-mc-01046, 2-15-mc-00147 and 2-16-cv-05044)
    District Judge: Hon. Cynthia M. Rufe
    _______________
    Submitted Under Third Circuit LAR 34.1(a)
    June 11, 2020
    Before: JORDAN, MATEY, and ROTH, Circuit Judges.
    (Filed June 11, 2020)
    _______________
    OPINION
    _______________
    JORDAN, Circuit Judge.
    After more than a decade of litigation, Appellants National Medical Imaging, LLC
    and National Medical Imaging Holding Co., LLC (collectively, “NMI”) seek review of
    the District Court’s grant of summary judgment in favor of Appellees U.S. Bank, N.A.,
    Ashland Funding LLC (“Ashland”), Lyon Financial Services, Inc. (“Lyon”) (now part of
    U.S. Bank), DVI Receivables XIV, LLC, DVI Receivables XVI, LLC, DVI Receivables
    XVII, LLC, DVI Receivables XVIII, LLC, DVI Receivables XIX, LLC (collectively,
    “DVI entities”), and Jane Fox, the Director of Operations for Lyon (collectively, “the
    creditors”). The District Court held that the creditors were not liable for damages under
    11 U.S.C. § 303(i)(2) for bringing an involuntary bankruptcy action in bad faith. We
    agree with the District Court that, even if the creditors acted in bad faith, NMI cannot
    prove the involuntary bankruptcy caused NMI’s failure. We thus do not reach the
    creditors’ cross-appeal and will affirm the District Court’s grant of summary judgment to
    the creditors. Our affirmance renders moot the pending motion for an injunction, so we
    will also deny that motion.
    
    This disposition is not an opinion of the full court and, pursuant to I.O.P. 5.7,
    does not constitute binding precedent.
    2
    I.     BACKGROUND
    A.     Factual Background
    As we have remarked before in a related case, “[i]t is an understatement to say that
    the factual background and procedural history lurking behind this case are complex.”
    Rosenberg v. DVI Receivables XVII, LLC, 
    835 F.3d 414
    , 416 (3d Cir. 2016).
    Nevertheless, a brief summary of the facts relevant to this appeal may suffice.
    NMI operated centers that provided medical imaging services, such as MRI, CT,
    and PET scanning. The company ran into financial difficulties that Maury Rosenberg,
    the managing owner of NMI, attributed to the Deficit Reduction Act of 2005.1 From
    2005 through 2007, NMI experienced a decline in the volume of scans by 16%. During
    the year 2007 alone, there was a decline of 19%. NMI was also already involved in
    litigation with U.S. Bank, during which Jane Fox, a named defendant in this case and, at
    the time, the Director of Operations for U.S. Bank, encouraged an aggressive legal
    strategy that included “out fil[ing]” NMI – meaning, it seems, to one-up NMI in the filing
    of legal documents. (App. 560.)
    By October 2008, NMI had closed all its centers outside of Pennsylvania. In an
    email to employees, an NMI representative said that “the Deficit Reduction Act severely
    affected the diagnostic imaging business” and that they should “work together to increase
    our Pennsylvania viability.” (App. at 576.) By that point, NMI was also experiencing
    strained relations with its primary lender, Sterling Bank. According to that bank, NMI
    1
    The Deficit Reduction Act of 2005, Pub. L. 109-171, 120 Stat. 4 (2006), affected
    the amounts that Medicare would pay for imaging services. See 42 U.S.C. § 1395w-4.
    3
    had “maxed out [its] credit line[,]” and there was “not a chance” it would further extend
    credit to NMI. (App. at 1437.)
    On November 3, 2008, an employee of a U.S. Bank affiliate who worked with
    NMI forwarded Rosenberg an email about a potential purchaser for NMI. In response,
    Rosenberg said he didn’t “believe that there [was] anything to talk about” because, “as
    previously discussed, we are in the process of closing all of the centers a-n [sic] this
    process should be completed no later than 12/15/08[.]” (App. at 1682.) Shortly after
    receiving that email, the company’s creditors, led by U.S. Bank, filed involuntary
    bankruptcy petitions on November 7, 2008 against NMI and Rosenberg in the United
    States District Court for the Eastern District of Pennsylvania.
    B.     Procedural History
    After the involuntary bankruptcy petitions were filed, the action against Rosenberg
    was moved to the United States District Court for the Southern District of Florida, where
    he resides. That bankruptcy petition was dismissed in August 2009. The petition against
    NMI was also subsequently dismissed, based on collateral estoppel principles and the
    decisions in the Rosenberg bankruptcy.
    Both NMI and Rosenberg brought separate adversary actions against the creditors,
    relying on 11 U.S.C. § 303(i)(2). The Rosenberg claim went to a jury trial, and the jury
    found bad faith on the part of the creditors in bringing the involuntary bankruptcy and
    awarded a total of $6.12 million in damages. Meanwhile, NMI pursued an adversary
    action against the creditors in the Eastern District of Pennsylvania. That case underlies
    the present appeal. In early motions practice, NMI claimed it was entitled to a trial by
    4
    jury for its claim under 11 U.S.C. § 303(i)(2), but the creditors countered that NMI had
    signed a settlement agreement waiving that right. The District Court agreed that NMI
    was entitled to a jury trial with respect to those creditors that were not parties to the
    settlement agreement or the successors or agents of any such party. The effect of that
    ruling was overtaken, however, by the parties’ motions for summary judgment.
    NMI sought partial summary judgment, arguing that preclusive effect should be
    given to the jury’s finding in the Southern District of Florida that the creditors acted in
    bad faith in filing an involuntary bankruptcy against Rosenberg. The District Court
    denied that motion. The creditors filed for full summary judgment, saying NMI could not
    prove bad faith, as required under § 303(i)(2), and that, even if it could, their bad faith
    actions did not cause NMI to go out of business.
    The District Court held that “[t]here are limited indicia of bad faith, which
    preclude any determination on that issue as a matter of 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.” Nat’l Med. Imaging, LLC v. U.S. Bank,
    N.A., No. 16-5044, 
    2019 WL 4076768
    , at *4 (E.D. Pa. Aug. 28, 2019) (“SJ Opinion”). It
    also held that NMI was not entitled to compensatory damages because “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.”
    Id. 5 NMI
    timely appealed the grant of summary judgment in favor of the creditors and
    the denial of its own motion for partial summary judgment.2 After briefing was almost
    concluded, NMI sought an injunction from this court to stop an auction scheduled to
    occur on June 15, 2020, in which U.S. Bank could seek to purchase NMI’s chose in
    action – this appeal – and thereafter terminate the appeal, thus finally closing the case.
    II.    Discussion3
    NMI argues that, for three reasons, the District Court erred in granting summary
    judgment. First, it says that determining whether the creditors acted with bad faith
    sufficient to justify punitive damages is a fact-intensive inquiry for a jury to decide and
    not appropriate for summary judgment, especially when the Court did not grant summary
    2
    NMI also appealed the ruling that it had waived its right to a jury trial with
    certain defendants based on an earlier settlement agreement with U.S. Bank. Ashland
    and the DVI entities cross-appealed, arguing that, if we decide that the District Court
    erred in granting summary judgment in their favor, we should also find that the District
    Court erred in determining that NMI was entitled to a jury trial. The jury issue is
    irrelevant, however, given our disposition of this appeal, so we do not address it.
    3
    The bankruptcy court had jurisdiction under 28 U.S.C. § 157, and the District
    Court had jurisdiction over the adversary proceeding under 28 U.S.C. § 1334. We have
    jurisdiction under 28 U.S.C. § 1291. We review a district court’s grant or denial of
    summary judgment de novo, applying the same standard that the district court applied.
    Jutrowski v. Twp. of Riverdale, 
    904 F.3d 280
    , 288 (3d Cir. 2018). Under that standard, a
    party is entitled to summary judgment if it can establish that “there is no genuine dispute
    as to any material fact[,]” and it “is entitled to judgment as a matter of law[.]”
    Id. (quoting Fed.
    R. Civ. P. 56). The District Court “has discretion in the awarding of
    damages under [11 U.S.C. §] 303(i)(2).” In re Landmark Distribs., Inc., 
    189 B.R. 290
    ,
    316 (D.N.J. 1995). We therefore review that decision for an abuse of discretion. Cf.
    Miller v. Apartments & Homes of N.J., Inc., 
    646 F.2d 101
    , 111 (3d Cir. 1981) (district
    court’s determination of punitive damages in housing discrimination case was not an
    abuse of discretion).
    6
    judgment on the issue of bad faith.4 Second, NMI relatedly argues that the District Court
    erred in denying its motion for partial summary judgment on the issue of bad faith based
    on collateral estoppel principles. Finally, NMI asserts that there are disputes of material
    fact as to whether the involuntary bankruptcy caused NMI to cease operations, so
    summary judgment was inappropriate. We are unpersuaded and instead agree with the
    District Court that, even if the creditors acted with some degree of bad faith, they are
    entitled to summary judgment because their behavior was not egregious enough to justify
    punitive damages and NMI cannot prove the involuntary bankruptcy proximately caused
    it any harm.
    A.      Punitive Damages
    The District Court granted the creditors’ motion for summary judgment on the
    punitive damages issue because it determined that NMI’s proof of bad faith, even if
    accepted as true, was not sufficient to show that the creditors did anything bad enough to
    warrant an award of punitive damages. On appeal, NMI argues that, before the Court
    addressed punitive damages, a jury should have addressed the question of bad faith,
    which is a fact-intensive inquiry.
    Under 11 U.S.C. § 303(i)(2)(B), a court “may” grant punitive damages. “The key
    word in section 303(i) is ‘may’; that is, the court has considerable discretion in deciding
    4
    As noted above, NMI sought partial summary judgment on the issue of bad faith,
    asking the District Court to apply collateral estoppel principles to the jury’s finding in the
    Southern District of Florida. The District Court denied that motion, and NMI appeals it
    here. We do not address that portion of the appeal, however, because we are accepting,
    for the sake of argument, that the creditors acted in bad faith.
    7
    to award … damages under 303(i)(2). … An award of punitive damages is discretionary
    even when the involuntary filing is found to have been in bad faith.” 2 Collier on
    Bankruptcy ¶ 303.33 (16th ed. 2020). The purposes of punitive damages under § 303(i)
    are the same as in other contexts: “punishment and deterrence.” In re Landmark
    Distribs., Inc., 
    189 B.R. 290
    , 317 (Bankr. D.N.J. 1995). “In considering whether to
    award punitive damages, a court should consider whether the petitioner in question’s
    conduct was malicious and vengeful[.]” 2 Collier on Bankruptcy ¶ 303.33.
    NMI’s central argument is that whether punitive damages are justified is
    inextricably tied to the facts that indicate bad faith. In NMI’s view, since the District
    Court did not decide the issue of bad faith, it could not have rightly decided the issue of
    punitive damages. NMI also claims that it need not prove harm to receive punitive
    damages, eliminating the causation hurdle it faces for compensatory damages. See In re
    S. Cal. Sunbelt Developers, Inc., 
    608 F.3d 456
    , 465 (9th Cir. 2010) (“We … hold that
    punitive damages may be awarded under § 303(i)(2)(B) even absent an award of actual
    damages under § 303(i)(2)(A).”).
    According to NMI, the creditors had improper motives in filing the involuntary
    bankruptcy, as demonstrated by Fox’s email about “outfil[ing]” NMI. That email,
    written to two other U.S. Bank employees a month before the involuntary bankruptcy
    was contemplated or filed, questioned whether U.S. Bank’s attorney in a separate state
    proceeding against NMI was sufficiently aggressive. Fox wrote,
    You have told me in the past that what you know about [Rosenberg] is that
    he does not conduct business above the table and is know [sic] to due [sic]
    business is [sic] rough areas. [K]nowing this and knowing that he will pull
    8
    out all legal and questionable tactics, I really need you to make sure that
    [our attorney] is a street fighter.
    (App. 560.) She then wrote that she did not think their attorney understood that he
    needed to “out file” Rosenberg “and not sit back and let things just go through the court
    systems.” (App. at 560.) NMI also points out that the creditors did not request an interim
    trustee during the involuntary bankruptcy, despite their having represented that was a key
    purpose for initiating the involuntary proceedings, and that some of the DVI entities that
    were listed as creditors were no longer in business when the petition was filed. See In re
    Rosenberg, 
    414 B.R. 826
    , 837 (Bankr. S.D. Fla. 2009).
    Even if those facts are taken at face value and as indicating bad faith, we cannot
    say that the District Court erred in concluding they do not justify punitive damages.
    Fox’s email, although certainly suggestive of an aggressive litigation strategy, does not
    evince malice towards NMI. And although the court dismissed the involuntary
    bankruptcy as improperly filed, that does not mean that to the filing – characterized aptly
    by the District Court as “a negligent and hasty approach” – constitute malicious,
    vengeful, or egregious behavior. SJ Opinion, 
    2019 WL 4076768
    , at *10. That is
    especially true when considering the context of the petition’s filing; Rosenberg had just
    told U.S. Bank that he planned to cease operations. The District Court was well within
    its discretion in determining that the level of bad faith shown by NMI’s proof was not
    egregious enough to justify an award of punitive damages.
    9
    B.     Compensatory Damages
    NMI also argues that the District Court overlooked disagreements on material
    facts pertaining to causation. Section 303(i)(2)(A) of the Bankruptcy Code requires that
    any damages for which defendants may be liable be “proximately caused” by the filing of
    the involuntary bankruptcy. The statute does not define proximate cause, so the common
    law definition applies. Field v. Mans, 
    516 U.S. 59
    , 69-70 (1995). Under general
    common law principles, proximate cause requires that the filing be a “‘substantial factor’
    in bringing about the plaintiff’s harm.” Bouriez v. Carnegie Mellon Univ., 
    585 F.3d 765
    ,
    771 (3d. Cir. 2009).
    Bankruptcy courts have held that when a business was failing before the filing of
    the involuntary bankruptcy, compensatory damages may not be justified. See In re
    Cannon Express Corp., 
    280 B.R. 450
    , 460-61 (Bankr. W.D. Ark. 2002) (not awarding
    compensatory damages because the debtor “was already experiencing an economic
    downturn in its business” before the involuntary bankruptcy petition, so the court could
    not determine what portion, if any, of the damage was proximately caused by the
    petition); In re Atlas Mach. & Iron Works, Inc., 
    190 B.R. 796
    , 804 (Bankr. E.D. Va.
    1995) (“Although compensatory damages may include loss of business during and after
    the pendency of the case, the undisputed evidence indicated that [the] business and work
    force had been on the wane for the past ten years. … Consequently, any additional loss of
    business following the filing of the petition is purely speculative and therefore, is not
    compensable.”) (collecting cases). Although reputational harm can be cognizable,
    “[a]sserting that the stigma of bankruptcy damaged a debtor’s business reputation and
    10
    hurt goodwill is not, in and of itself, sufficient evidence. There must be evidence
    supporting a damage claim.” 2 Collier on Bankruptcy § 303.33.
    Despite Rosenberg’s clear and contemporaneous statements to the contrary, NMI
    claims that it was not planning to close its centers before the involuntary bankruptcy was
    filed. It also says that the involuntary bankruptcy ruined its reputation with physicians
    and its primary lender. NMI first points to deposition testimony from an NMI employee
    who said there had been “hubbub talk” at referral centers about the involuntary
    bankruptcy, so doctors were no longer referring patients to NMI for imaging services.
    (App. at 937.) But that employee also admitted that none of the referring physicians
    mentioned the involuntary bankruptcy. NMI further points to the email it sent to
    employees in October 2008, after closing centers in Maryland and Illinois. That email
    told employees that the company had been forced to close the centers in Maryland and
    Illinois because “the Deficit Reduction Act severely affected the diagnostic imaging
    business,” and the message encouraged employees to “work together to increase our
    Pennsylvania viability.” (App. at 576.) NMI says that the email is evidence of “a
    decision by NMI to restructure” and that statements by Rosenberg to the contrary were
    “taken out of context.” (Opening Br. at 39.) Finally, NMI notes that the involuntary
    bankruptcy constituted an event of default under the terms of its loan from its primary
    lender, Sterling Bank.
    Even when taken in the light most favorable to NMI, the evidence does not prove
    causation. No reasonable jury would credit unsubstantiated rumors as evidence, rumors
    that were, in any event, likely to be ruled inadmissible hearsay. And that is all the NMI
    11
    employee could have provided. The email to employees confirms rather than refutes that
    NMI was experiencing severe financial difficulties before the involuntary bankruptcy. In
    light of Rosenberg’s unambiguous statement that he planned to close all of the imaging
    centers by December 15, 2008, the email cannot fairly be read as a call to restructure the
    business.
    Indeed, there can be little doubt that NMI was on the brink of failure when the
    involuntary bankruptcy petition was filed. According to Rosenberg’s contemporaneous
    reports, NMI had experienced a dramatic decline in business. Rosenberg consistently
    blamed the Deficit Reduction Act for those declines. Although NMI identifies one loan
    on which it defaulted as a result of the involuntary bankruptcy, it does not dispute the
    evidence showing that it had already “maxed out [its] credit line” with its primary lender,
    and that the bank said there was “not a chance” it would have further extended credit to
    NMI, even without the involuntary bankruptcy. (App. at 1437.) Because the involuntary
    bankruptcy petition was filed when NMI was already in irreversible decline – by all
    appearances on the precipice of complete collapse – the petition was not the proximate
    cause of the business’s failure. A reasonable jury could not find otherwise.
    III.   CONCLUSION
    For the foregoing reasons, we will affirm the District Court’s grant of summary
    judgment in favor of the creditors. Because our affirmance of that judgment concludes
    this case, we will deny the motion for an injunction as moot.
    12