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DONOVAN v. ROTHMAN

July 18, 2000

CARMEL N. DONOVAN, ERICH EIDENSCHENK, DAVID FOLLETT, AND ESTATE OF FRANK M. PURNELL, INDIVIDUALLY AND AS SHAREHOLDERS OF LH RADIOLOGISTS, P.C., PLAINTIFFS,
V.
LEWIS ROTHMAN, STEPHEN SCHARF, R.S. BILLING SYSTEMS, INC., LENOX HILL HOSPITAL, AND LH RADIOLOGISTS, P.C., DEFENDANTS.



The opinion of the court was delivered by: Stein, District Judge.

OPINION & ORDER

The Hospital subsequently removed this action to this Court pursuant to 28 U.S.C. § 1441(a) on the grounds that the application of the anti-kickback statute presents a substantial federal question. Plaintiffs have now moved to remand this action to New York Supreme Court pursuant to 28 U.S.C. § 1447(c) on the grounds that no substantial federal question has been presented. Because the complaint does not present a substantial federal question, plaintiffs' motion to remand this action is granted.

BACKGROUND

According to the amended complaint, plaintiffs as well as two of the defendants — Lewis Rothman and Stephen Scharf — were radiologists on the staff of Lenox Hill Hospital in the early 1980s. See Am. Compl. ¶¶ 13-14. Those individuals ultimately incorporated LH Radiologists, P.C. as a separate professional corporation through which they provided radiological services pursuant to a fee-for-service arrangement with the Hospital. See id. ¶¶ 16, 26, 28. Each of the radiologists was a shareholder. See id. Rothman was director of the Department of Radiology at the Hospital as well as President of LH Radiologists. See id. ¶¶ 28-29.

Specifically, in December 1987, Rothman, acting on behalf of LH Radiologists, entered into a "Fee For Service Agreement" as well as a separate "Supplemental Agreement" with the Hospital, whereby LH Radiologists would bill patients directly and then forward a portion of the proceeds to the Hospital in accordance with the following terms:

It is hereby agreed that [LH Radiologists'] net annual collections in excess of an amount equal to its actual, usual, ordinary and necessary expenses of operation . . . shall be distributed as follows: 66-2/3% to [LH Radiologists]; 25% to a department of Radiology Fund ("the Fund") to be utilized for capital improvements, equipment, and other expenditures for the Department . . .; and 8-1/3% to the Hospital for its general purposes. Said amounts shall be estimated and payable quarterly, with adjustments at the end of each annual term.

Id. ¶ 30 (quoting Supplemental Agreement ¶ 1). Pursuant to this provision, LH Radiologists paid or credited the Hospital approximately $3.75 million through October 31, 1998. See id. ¶ 32.

In 1988, Rothman allegedly caused a certificate to issue to himself for all shares of LH Radiologists, thus purporting to make himself the sole shareholder of the corporation. See id. ¶ 34. Subsequently, according to the complaint, Rothman operated LH Radiologists as a sole proprietorship, unilaterally fixed salaries, and engaged in other illegal, improper, and self-dealing transactions, including the transfer of the corporation's billing services business to R.S. Billing Systems, Inc., a separate entity wholly owned by Rothman and Scharf. See id. ¶¶ 35, 42-44, 53-55.

When Rothman refused a request by Donovan and Purnell to inspect the books and records of LH Radiologists, they brought a special proceeding in New York Supreme Court to compel inspection pursuant to N.Y. Business Corporation Law § 624 and New York common law. See id. ¶¶ 36-37. The New York Court of Appeals ultimately affirmed the lower courts' conclusion that plaintiffs were in fact shareholders of LH Radiologists. See In Matter of Estate of Purnell v. LH Radiologists, P.C., 90 N.Y.2d 524, 530-32, 686 N.E.2d 1332, 1335-36, 664 N.Y.S.2d 238, 241-42 (1997), aff'g 228 A.D.2d 360, 361-62, 644 N.Y.S.2d 274, 274-75 (1st Dep't 1996).

In 1996, plaintiffs brought this shareholder derivative action in New York Supreme Court alleging breach of fiduciary duty by Rothman and Scharf and naming LH Radiologists as a nominal defendant. Extended motion practice followed. See Donovan v. Rothman, 256 A.D.2d 184, 184-85, 683 N.Y.S.2d 25, 26 (1st Dep't 1998); Donovan v. Rothman, 253 A.D.2d 627, 629-30, 677 N.Y.S.2d 327, 329-30 (1st Dep't 1998).

In late September 1999, Justice Shainswit of New York Supreme Court granted plaintiffs' motion to add the Hospital as a defendant to the claim seeking recovery for breach of fiduciary duty on the grounds that payments made to the Hospital pursuant to the fee-for-services agreement amounted to illegal kickbacks in violation of 42 U.S.C. § 1320a-7b(b).*fn1 In granting the motion, the Supreme Court reasoned that "[t]he proposed claim against the Hospital seeks recovery of those same funds"; that "[t]he issues as to both claims are largely the same"; and that a separate action against the Hospital would prove unduly wasteful. Donovan v. Rothman, No. 105335/96-010 & 011, slip. op. at 2-3 (N.Y.Sup.Ct. Sept. 29, 1999); Aff. of Joseph H. Einstein, dated Nov. 17, 1999, Ex. B.

The Hospital then removed the entire derivative action to the Southern District of New York pursuant to 28 U.S.C. ยง 1441(a) on the grounds that the allegations against the Hospital turn on the application of the federal anti-kickback statute and therefore present a substantial federal question. As noted above, plaintiffs have now moved to remand the action to New York Supreme Court ...


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