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In re VPH Pharmacy, Inc.

United States District Court, E.D. Michigan, Southern Division

July 25, 2018

In re VPH PHARMACY, Inc. Debtor, SAMUEL D. SWEET, Chapter 7 Trustee, Plaintiff,



         Debtor VPH Pharmacy (“VPH”) filed for bankruptcy on January 13, 2017. The United States Government filed a motion for withdrawal of the reference of that portion of the bankruptcy proceedings which encompasses proceeds seized by the Drug Enforcement Agency (“DEA”) around September 22, 2015 from VPH's bank accounts.

         For the reasons that follow, that motion is GRANTED.

         I. Background

         In September of 2015, as a result of an ongoing criminal investigation, the DEA seized $230, 068.79 and $11, 793.55 from two Fifth Third Bank accounts, in the names of VPH Pharmacy PC and VPH Pharmacy, Inc., respectively. On May 17, 2016, the Government filed a second amended complaint in an in rem civil forfeiture proceeding against more than $1, 000, 000 held in numerous bank accounts, including the two Fifth Third Bank accounts, pursuant to 21 U.S.C. § 881(a)(6), 18 U.S.C. §§ 981(a)(1)(A) and/or 981(a)(1)(C). These accounts were linked to Devenkumar Patel and Amee Patel, who owned multiple pharmacies, including VPH. The Government alleges that these proceeds were generated from or traceable to drug diversion and/or health care fraud, used to facilitate federal crimes, or involved in money laundering.

         The Court granted the Government's motion to stay the civil forfeiture proceedings during the pendency of the related criminal investigation and proceedings. Accordingly, no judgment has been entered in the civil forfeiture proceeding; the seized funds remain in the Government's possession.

         Eight months later - on January 13, 2017 - VPH filed for bankruptcy under Title 11, Chapter 11 of the United States Bankruptcy Code. The petition was converted to Chapter 7 on June 30, 2017. The Chapter 7 Trustee (“Trustee”) filed an adversary proceeding on February 15, 2018 seeking turnover of the Fifth Third Bank Account proceeds by the United States under 11 U.S.C. § 542(a); and, alleging fraudulent transfer under 11 U.S.C. § 550(a)(1)(B). In his complaint, the Trustee alleges that the seized property is part of the bankruptcy estate and can be used to pay creditors - which would not include the Medicare Trust Fund. Alternatively, the Trustee seeks to avoid and recover the seized funds as a fraudulent transfer.

         On April 23, 2018, the Government filed its motion to withdraw the reference from the bankruptcy proceeding with respect to the seized property. It argues that 1) withdrawal is mandatory because resolution of the civil forfeiture case requires significant and material consideration of both Title 11 and non-bankruptcy laws that regulate activities affecting interstate commerce; 2) alternatively, the District Court may permissively withdrawal the reference because the civil forfeiture case is a non-core proceeding that can only be decided in bankruptcy court with the Government's consent; and 3) the civil forfeiture case is exempt from the automatic stay as an exercise of the Government's police power under 11 U.S.C. § 362(b)(4).

         In response to the Government's motion, the Trustee argues: 1) mandatory withdrawal is not warranted because the resolution of the Trustee's claims does not require substantial consideration of other federal laws; 2) none of the factors supporting permissive withdrawal is present; and 3) the automatic stay prohibits the Government from enforcing a civil forfeiture money judgment.

         II. Analysis

         Before addressing mandatory withdrawal, the Court must first consider whether the seized assets should even be part of the bankruptcy estate.

         A. The Forfeited Property Is Not Part Of The Bankruptcy Estate

         After the Government filed its civil forfeiture complaint against VHS, the Clerk of the Court issued arrest warrants for the two VPH seized bank accounts at issue. The warrants served as notice to VPH that the seized bank accounts were in the Attorney General's custody and control. 21 U.S.C. § 881(c).

         The Trustee admits that the only issue relevant to deciding his claims that requires consideration of federal law is whether the monies seized by the Government constitute property of the estate. According to the Trustee, this issue was resolved by the Supreme Court in United States v. 92 Buena Vista Ave., 507 U.S. 111, 127 (1993), when it held that until a court enters a judgment of forfeiture, the Government does not take title to seized ...

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