United States Of America v. Narco Freedom, Inc.

Filing 383

MEMORANDUM OPINION AND ORDER. For the foregoing reasons, the Temporary Receiver's motion is granted. The applications of the Former Executives, the Former Employees, and the Landlords are denied without prejudice. The parties may bring their app lications in the bankruptcy court. The Clerk is directed to close Docket Nos. 305, 306, 307, 313, 335, and 350. re: 313 MOTION to Direct -Jason Brand's Motion for an Order Directing the Receiver to pay His Accrued Time filed by Jason Brand, 307 MOTION for Release of Funds filed by Jonathan Brand. (Signed by Judge John G. Koeltl on 12/18/2015) (rjm)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
────────────────────────────────────
UNITED STATES OF AMERICA,
Plaintiff,

14-cv-8593 (JGK)

- against -

MEMORANDUM OPINION AND
ORDER

NARCO FREEDOM, INC.,
Defendant.
────────────────────────────────────
JOHN G. KOELTL, District Judge:
On November 23, 2015, the Temporary Receiver for Narco
Freedom moved for authority to file a petition for bankruptcy
under Title 11 of the United States Code. Dkt. No. 350. The
Court heard argument from interested parties on December 7,
2015. On December 9, 2015, the Temporary Receiver filed a
proposed order granting the motion for authority to file a
petition for Narco Freedom. Dkt. No. 371. Several interested
parties filed oppositions to the motion on December 14, 2015.
Dkt. Nos. 376, 377, 378, 379, 380, and 381. For the reasons
explained below, the Temporary Receiver’s motion is granted.
At the time of the Temporary Receiver’s motion,
applications by Alan Brand, Jason Brand, Jonathan Brand, and
Gerald Bethea (“Former Executives”) for payment of accrued
vacation and personal time were pending.

Former employees of

Narco Freedom, represented by the Fuchsberg law firm (“Former
Employees”), also had a pending application which requested
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payment of all accrued vacation pay and severance. The Temporary
Receiver had previously paid the former employees eight weeks of
vacation pay and held eight weeks of vacation pay in a reserve
fund for the Former Executives. The landlords of properties
previously occupied by Narco Freedom, including properties that
were transitioned to a substitute provider, Samaritan Village
(“Landlords”), filed an application requesting that the
Temporary Receiver be ordered to pay the Landlords for building
code violations and repairs to the buildings. For the reasons
explained below, those applications are denied without
prejudice.
A.
The Former Executives and the Landlords oppose the motion
for authority to file a bankruptcy petition for several
reasons:(1) the Temporary Receiver has not provided financial
statements to determine whether Narco Freedom’s liabilities
exceed its assets; (2) the bankruptcy proceedings will delay
payments to the Former Executives and the Landlords; (3) there
is no “legal basis” for a receiver being authorized to file a
bankruptcy petition.
The Court concludes that the Temporary Receiver’s motion is
well founded. Based on the numerous claims asserted against
Narco Freedom, it is evident that Narco Freedom’s potential

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liabilities exceed Narco Freedom’s assets. An administrative
hearing is pending on a $1.3 million-dollar claim brought by the
Office of the Medicaid Inspector General against Narco Freedom.
Dkt. No. 363. The Government has asserted that it has a
substantial claim under the False Claims Act, and it has even
asserted that all of Narco Freedom’s funds should be restrained
under 18 U.S.C. § 1345(a)(2) as proceeds of a Medicaid fraud.
Dkt. No. 345. In addition to these claims, the Former Executives
seek payment of vacation pay in various amounts 1, and there is an
application by the Fuchsberg firm for additional compensation
for the Former Employees in the amount of $754,741.42. Dkt. No.
336. Finally, the Landlords claim that Narco Freedom owes them
about $890,780 for past building code violations and for
restoration costs. Dkt. No. 337. The proper way to resolve all
these claims is in bankruptcy where assets and liabilities can
be determined.
To the extent the Former Executives criticize the Temporary
Receiver for not being more forthcoming about Narco Freedom’s
assets, the Temporary Receiver will have to file a schedule of
assets and liabilities in the bankruptcy court. The interested
parties may file objections to the bankruptcy petition and claim

1 Alan Brand claims he is owed $567,999.81. Dkt. No. 318. Jonathan Brand
claims he is owed $64,173.65. Dkt. No. 308. Jason Brand claims he is owed
$178,166.85. Dkt. No. 133. Gerald Bethea claims he is owed $92,829.64. Dkt.
No. 275.

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that there is no basis for the bankruptcy filing. And as to
liabilities, it is plain that there are substantial liabilities,
and questions as to the amount of liabilities, their
recoverability, and their priority can best be resolved in
bankruptcy.
Moreover, contrary to the Former Executives’ argument that
there is no legal precedent for transitioning a receivership to
a bankruptcy case, there are several instances where a district
court that had previously appointed a receiver expanded the
authority of the receiver to include the power to file for Title
11 protection and initiate a bankruptcy case. Expanding the
power of a receiver in this context is by no means novel. See,
e.g., United States v. Robert Egan, 10-cv-3121 (TPG), Dkt. No.
10 (S.D.N.Y. Apr. 29, 2010) (“Order Expanding the Scope of the
Receiver’s Authority and Authorizing the Receiver to Place Mount
Vernon Money Center Corp. and Affiliates under Protection of
Title 11 of the United States Code”); see also JY Creative
Holdings, Inc. v. McHale, No. 8:14-CV-2899-JSM, 2015 WL 541692,
at *2 (M.D. Fla. Feb. 10, 2015) (“Here, the receivership order
authorized the Receiver to take all action on behalf of the
Debtors, and it specifically enjoined the Debtors from
interfering with the Receiver’s duties. The district court
subsequently issued an order explicitly authorizing the Receiver
to file for bankruptcy on the Debtor’s behalf.”); Kelley v.
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College of St. Benedict, 901 F. Supp. 2d 1123, 1125-26 (D. Minn.
2012) (noting that a receiver appointed pursuant to 18 U.S.C. §
1345 over a company accused of engaging in a Ponzi scheme was
subsequently authorized to file a petition for bankruptcy and
even later served as the trustee in bankruptcy); In Re
Stratesec, Inc., 324 B.R. 156 (Bankr. D.D.C. 2004) (“A federal
district court’s order appointed Wedren as receiver and
authorized him to file the bankruptcy petition on the debtor’s
behalf.”).
The need to transition a receivership to bankruptcy may
arise when there are competing claims that threaten to dismember
the receivership estate. For example, in SEC v. Churchill
Securities, Inc., 223 B.R. 415, 416 (S.D.N.Y. 1998), the
district court noted that Judge Griesa had frozen the assets of
a company and affiliated entities accused of securities
violations and appointed a receiver. The receiver sought a
modification of the receivership order after investors filed
multiple suits in state court seeking to gain priority over
other potential claimants. The district court modified the order
to allow the receiver to place the companies in bankruptcy. Id.
at 416-17. Similarly here, applications by the Former
Executives, the Former Employees, and the Landlords demanding
immediate payment of amounts allegedly owed to them would result
in the piecemeal dismemberment of Narco Freedom while forfeiture
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claims against Narco Freedom are still unresolved and while the
state and federal governments are themselves contending that
they are owed substantial amounts of money by Narco Freedom.
Such dismemberment will be averted by an orderly bankruptcy
where the interested parties and the state and federal
governments can pursue their claims. For these reasons, the
Temporary Receiver’s motion for an order authorizing the
Temporary Receiver to file a bankruptcy petition is granted.
B.
The specific applications by the Former Executives, the
Former Employees, and the Landlords are denied without prejudice
for the reasons detailed below.
1.
Alan Brand, Jason Brand, and Jonathan Brand each seek
immediate payment of allegedly accrued vacation, personal, and
sick time. They assert that the amounts are undisputed and that
therefore they should be paid.

However, the applications are

opposed by the Temporary Receiver, the Government, and the
Attorney General’s Office. There are plainly issues of fact as
to whether the amounts sought are excessive compensation,
whether payments to the Former Executives are a misuse of
charitable assets, as the Attorney General’s Office argues, and
whether the funds available to Narco Freedom should not be used
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because they are the proceeds of Medicaid fraud. Therefore, each
of their applications is denied without prejudice to being
raised in the bankruptcy proceeding.
2.
With regards to Gerald Bethea’s application, the Temporary
Receiver agrees that Mr. Bethea should be paid $38,461.53 for
eight weeks of accrued vacation time which is presently reserved
in an escrow account. The Temporary Receiver initially portrayed
this payment as a settlement with Mr. Bethea. The Temporary
Receiver explained that she was satisfied that this payment was
not excessive compensation. However, Mr. Bethea made it clear
during the last conference that this payment was not a
settlement, and that he was actually seeking $92,829.64 in
accrued time, $6,000 for a bail bond, and $72,115.35 in
severance pay. Mr. Bethea’s application is opposed by the
Government and the New York State Attorney General’s Office in
all its aspects.
The Court could not resolve the issues raised by this
application—even with regards to the eight weeks of vacation pay
currently in escrow—without an evidentiary hearing. Simply
because the Temporary Receiver agreed that eight weeks of
vacation pay was not excessive compensation does not make it so.
Moreover, the vacation pay is only a small part of the total

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amount sought by Mr. Bethea. And, as Mr. Bethea made clear,
giving him eight weeks of vacation pay does not resolve all of
his claims. The Court would still have to resolve the objections
raised by the Government and the New York State Attorney
General. Thus, there is no basis to treat Mr. Bethea differently
from the other former executives.

Mr. Bethea’s claims are

denied without prejudice to being raised in the bankruptcy.
3.
It is plain that the application for additional
compensation for the Former Employees could not be decided on
the current papers. Counsel for the Former Employees
acknowledges that more investigation may be necessary to
determine whether the eight-week cap applied to accrued leave
time. Dkt. No. 351. Given the need for further factual
development and discovery, the Former Employees’ claims cannot
be decided now and should also be decided in bankruptcy. Thus,
the Former Employees’ application for payment is denied without
prejudice to being raised in the bankruptcy proceeding.
In partial opposition to the motion to file a bankruptcy
petition, the Former Employees took no position on the merits of
the Temporary Receiver’s motion for authority to file a
bankruptcy petition. The Former Employees however sought
certification of a class of former employees of Narco Freedom.
In light of the foregoing factual issues, the request for class
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certification and the request in the alternative to move for
prepetition class certification are denied without prejudice to
being raised in the bankruptcy proceeding.
4.
The Landlords seek somewhere between $800,000 and $1
million in building code violations and restoration costs. Dkt.
No. 380. The Temporary Receiver does not concede that Narco
Freedom is responsible for the alleged violations. Before
deciding the Landlords’ motion it would be necessary to
adjudicate the facts disputed by the Landlords and the Temporary
Receiver, something that could not be done on the present
papers. The application to direct the Temporary Receiver to pay
outstanding penalties is denied without prejudice to being
raised in the bankruptcy proceeding.

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CONCLUSION
For the foregoing reasons, the Temporary Receiver’s motion
is granted. The applications of the Former Executives, the
Former Employees, and the Landlords are denied without
prejudice. The parties may bring their applications in the
bankruptcy court. The Clerk is directed to close Docket Nos.
305, 306, 307, 313, 335, and 350.
SO ORDERED.
Dated:

New York, New York
December 18, 2015
___________/s/________________
John G. Koeltl
United States District Judge

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