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