UNITED STATES BANKRUPTCY COURT 

 FOR THE 

 EASTERN DISTRICT OF VIRGINIA

 Alexandria Division

In the Matter of: :

 : Chapter 11

MEDICAL ASSOCIATES OF :

MT. VERNON, INC., :

 : Case No. 20-11615-KHK

 Debtor. :

:

OBJECTION OF THE UNITED STATES TRUSTEE TO DEBTORS’ MOTION FOR 

ORDER (A) AUTHORIZING AND APPROVING ASSET PURCHASE AGREEMENT; 

(B) AUTHORIZING THE SALE OF ASSETS FREE AND CLEAR OF LIENS, CLAIMS, 

INTERESTS AND ENCUMBRANCES; (C) AUTHORIZING THE ASSUMPTION AND 

ASSIGNMENT OF CERTAIN EXECUTORY CONTRACTS; AND PROVIDING FOR 

HEARING ON APPROVAL OF THE MOTION

Comes now John P. Fitzgerald, Acting United States Trustee, Region Four, (the “UST’) 

and objects to Medical Associates of Mt. Vernon, Inc.’s (the “Debtor”) Motion for Order (A) 

Authorizing and Approving Asset Purchase Agreement; (B) Authorizing the Sale of Assets 

Free and Clear of Liens, Claims, Interests and Encumbrances; (C) Authorizing the Assumption 

and Assignments of Certain Executory Contracts; and Providing for Hearing on Approval of 

the Motion (the “Motion” docketed as ECF No. 82). This objection is filed pursuant to 28 

U.S.C. §586 and 11 U.S.C. §307. The Motion should be denied as granting same would allow 

the Debtor to succeed in an unfair and unreasonable sale which benefits primarily the insiders 

in receiving the assets of the estate without giving fair value to the creditors in the subchapter 

V case and subverting the plan and confirmation process. In support of his objection, the UST 

alleges as follows:

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PRELIMINARY STATEMENT

It is clear from the record that the Debtor is in no position to reorganize and that the 

Debtor will seek to utilize subchapter V to liquidate substantially all, if not all, of its assets

prior to filing a plan in this case. Through the Motion, the Debtor is seeking the Court’s 

approval of the sale of substantially all of its assets to Mount Vernon Medical Associates, P.C., 

whose only owners, Albert Herrera and Stephanie Carter, are the only owners of the Debtor. 

Though the sale is to be free and clear of all liens, claims and interests pursuant to section 

363(f), the proceeds of the proposed sale will not be sufficient to satisfy the secured claim of 

the Internal Revenue Service and it does not appear that the IRS has consented to the sale. 

Even if the IRS does consent, it will leave no other creditors with any payment whatsoever, so 

it will be, at best, a minimum payout to only one creditor which is not the object of subchapter 

V.

The sale is not in the best interest of the Debtor’s estate. The Debtor cannot carry its

burden of proving that this private sale is either fair or reasonable, nor can it show the good 

faith required for every 363 sale, particularly under the heightened scrutiny required when the 

sale has been orchestrated among insiders. There has been no effort to market and sell the 

Debtor’s assets and the Debtor should not be permitted to undermine the subchapter V process 

through this standalone private sale to the Debtor’s insiders. The sale is not being conducted 

subject to higher and better offers or bids. Rather, the Motion should be denied or deferred at 

least until the Debtor retains a broker and the broker has an opportunity to evaluate the value 

of the Debtor’s assets and solicit higher and better offers than the current insider offer.

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BACKGROUND

1. On July 10, 2020 (the “Petition Date”), the Debtor filed a voluntary petition for 

relief under Chapter 11 of the Bankruptcy Code. The Debtor is operating its business and 

managing its assets as debtor-in-possession pursuant to §§1107(a) and 1108 of the Bankruptcy 

Code. No trustee or examiner has been appointed in this Chapter 11 case. On March 27, 2020, 

the Debtor amended its Voluntary Petition to select the Small Business Debtor designation. 

ECF Doc. No. 34.

2. The Debtor is in the business of providing medical services to individuals in the 

northern Virginia area at several locations which are leased from various entities.

3. The Debtor is and has been at all times during the course of this bankruptcy, a 

professional corporation.

4. The Debtor is owned by two shareholders:

a. Albert Herrera, who owns a 50% interest (“Herrera”).

b. Stephanie Carter, who owns a 50% interest (“Carter”).

5. The Debtor has operated under this name since March 4, 2020, when a name 

change was filed with the Virginia State Corporate Commission. Prior to that, the Debtor 

operated under the name of Mt. Vernon Internal Medicine, P.C. Mt. Vernon Internal Medicine, 

P.C., was originally formed on December 11, 1981. 

6. Herrera and Carter have, upon information and belief, been the sole 

shareholders of the Debtor since at least December 31, 2015.

7. Mount Vernon Medical Associates, P.C. (“MVMA”) is a Virginia corporation 

formed on September 29, 2020.

8. MVMA has two initial directors:

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a. Alberto Herrera1

; and

b. Carter.

9. The office address for MVMA is listed as 8988 Lorton Station Blvd, Suite 100, 

Lorton, VA 22079-4757 in its Articles of Organization. 

This is the same address for the Debtor per the Amended Petition filed on July 29, 2020, 

question 4, which shows the principal place of business as 8988 Lorton Station Blvd., Suite 

100, Lorton, VA 2209.

10. The Motion also provides for the assumption and assignment of certain leases 

and other agreements with certain limited liability companies, including but not limited to:

a. Laurel Hill Site Center, LLC, which is currently owned by Albert A. 

Herrera (1%), Katherine B. Herrera (55.716%) and Stephanie D. Carter (43.284%) as 

of June 17, 2016. This entity is the company who owns and leases the property at 8988 

Lorton Station Blvd. to the Debtor; and 

b. Springfield Development Group, which is currently owned by Albert 

Herrera (18.16%), Stephanie D. Carter (42.58%) and the Herrera Family Trust 

1 Unless there is a new party being introduced to the transaction, it is believed that this is a typographical error and 

this is Albert Herrera.

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(39.26%) as of December 31, 2016. This entity is the company who owns and leases 

the property at 6128 Brandon Avenue to the Debtor.

c. The assumption of these two leases and agreements are an additional 

financial gain and benefit to the insiders.

d. There are two other leases being assumed which are owed to third 

parties in SL Hinson Assoc., LLLP and Beal Lowen for office spaces at 8109 Hinson 

Farm Rd. The Debtor does not, to the knowledge of the UST, have an interest in those 

locations financially.

ARGUMENT 

Section 363(b) of the Code provides that a debtor-in-possession “may use, sell, or lease ... 

property of the estate” outside of the ordinary course of business after notice and a hearing. 11 

U.S.C. § 363(b). Although section 363(b) does not require Chapter 11 debtors to propose a plan 

of reorganization before selling estate assets, many courts impose their own requirements on such 

pre-confirmation sales to prevent debtors from using section 363(b) as a vehicle for circumventing 

the protections afforded creditors under Chapter 11. In re W.A. Mallory Co., Inc., 214 B.R. 834, 

836 (Bankr. E.D. Va. 1997).

This Court follows and has adopted the sound business purpose test as the standard to be 

used in determining the appropriateness of a pre-confirmation sale. Id.; see also In re WBQ 

Partnership, 189 B.R. 97, 102 (Bankr. E.D.Va. 1995); see also Stephens Indus., Inc. v. McClung, 

789 F.2d 386, 390 (6th Cir. 1986); Committee of Equity Sec. Holders v. Lionel Corp. (In re Lionel 

Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983). This review should be especially heightened in a 

subchapter V case and where the sale is proposed to be made to insiders of the Debtor. 

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In reviewing a motion to sell, a court must find and the Debtor must prove that: (i) a sound 

business reason justifying the pre-confirmation sale, (ii) adequate and reasonable notice of the sale

was provided to all parties, (iii) that the sale has been proposed in good faith and (iv) that the 

purchase price is fair and reasonable.” Rose v. Logan, 2014 U.S. Dist. Lexis 38890 (D. Md. 2014); 

see also In re MCSGlobal Inc., 562 B.R. 648 (Bankr. E.D.V.A. 2011); In re W.A. Mallory Co., 

Inc., 214 B.R. at 836.

The sale itself fails the sound business purpose test on three of the four points. One of the 

main issues is that the sale of the business at this juncture of the case fails to be supported by a 

sound business purpose. As argued by the Debtor, the income is “likely to remain somewhat flat 

over the coming months” but specifically does not state that it is decreasing, which is an important 

factor to consider in rushing to attempt to sell the assets prior to a hearing on confirmation.2 

Motion at page 2; See also Committee of Equity Sec. Holders v. Lionel Corp., 722 F. 2d 1063, 

1071 (2d Cir. 1983). 

As to the sound business reason for justifying the sale, the UST cannot opine that a sale of 

the business it not an option which may have merit. However, a 363 sale should not be approved 

unless and until the debtor can show that it will benefit the estate as a whole. See In re Au Natural 

Restaurant, Inc., 63 B.R. 575, 581 (Bankr. S.D.N.Y. 1986) (refusing to approve a sale where most 

of the sale proceeds would benefit one creditor); In re Fremont Battery Co., 73 B.R. 277, 279 

(Bank. N.D. Ohio 1987) (the court found no business reason to justify the sale where the proceeds 

2 Debtor has also represented this theme or position during this case. In its Motion to Determine Need for Medical 

Ombudsman, Docket 46, paragraph 2, it stated that “MVIM is continuing in the operation of its business and expects 

professional service revenues to continue to grow post-petition.” The July operating report, filed as Docket 65, 

showed cash receipts of $608,243.92 and net cash flow of $269,968.71. The August operating report, filed as 

Docket 69, showed cash receipts of $487,042.09 and net cash flow of ($62,649.48. September’s operating report 

has not been filed and additional documents including aging accounts receivable, payroll information, filed taxes 

and other financial documentation, which were previously requested, have not been provided to the U.S. Trustee’s 

office, making the review incomplete.

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would, at most, benefit a single creditor). Here, the sale proceeds will not be sufficient to satisfy 

the IRS secured claim and it is not clear whether the IRS has consented to the sale. The proposed 

sale to the insider controlled MVMA will only benefit the insiders and one creditor. Thus, it should 

not be approved. 

 The monthly operating reports filed with the court to date shows that the Debtor’s 

business is suffering, and thus changes are required, but allowing a sale prior to the confirmation 

hearing date of substantially, if not all, of the assets of the business for de minimis value and return 

to the estate would be premature. The motion is effectively an attempt at a sub rosa plan, in that 

it predetermines the essential terms of the plan of reorganization. This is disfavored by the Courts 

and should be rejected here as it circumvents the plan confirmation process and deprive creditors 

of the protections it affords. See Pension Benefit Guar. Corp. v. Braniff Airways, Inc., 700 F.2d 

935, 939-40 (5th Cir. 1983); see also In re Gulf Coast Oil Corp., 404 B.R. 407 (Bankr. S.D. Tex. 

2009). This issue is even more important in a subchapter V case, since there is no unsecured 

creditors committee and the plan proposal and confirmation process is on a much faster track than 

in a normal Chapter 11. Objections to confirmation in this case are due by December 8 with plan 

confirmation set for December 15, 2020.

As to the notice factor of the test, the UST raises a question as to the adequacy of notice

provided to creditors in this case. At the status conference, it was found that one of the largest 

lenders in the case, Atlantic Union Bank, who provided the PPP loan just prior to the filing of the 

petition, had not been listed as a creditor in the initial filing resulting in an amended petition. There 

are other lenders who have debts owed above $1,000,000 who have not participated to date and 

stand to be wiped out completely if the Motion is approved. Notice of the sale needs to be 

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established as confirmed or sufficient to ensure that the Motion is consensual or at least understood 

by all parties in the case.

The third prong of the analysis requires the Court to assess whether the sale has been 

proposed in good faith. This element requires the Court to scrutinize the sale to insure that it was 

an arms’ length transaction and absolutely fair under the circumstances. In re W.A. Mallory Co., 

214 B.R. at 837. A debtor-in-possession and its senior officers owe a duty of loyalty to the 

bankruptcy estate, which includes refraining from insider self-dealing and avoiding conflicts of 

interest and the appearance of impropriety. See In re Coram Healthcare Corp., 271 B.R. 228, 235-

36 (Bankr. D. Del. 2001); see also In re Hechinger Investment Company of Delaware, 327 B.R. 

537, 549 (D. Del. 2005). 

Although the Debtor alleges that the sale was negotiated at arms' length, this is by definition 

an impossibility where the purchaser is an insider. Courts apply a higher degree of scrutiny to 

approve sales to insiders. In re Bidermann Indus. U.S.A., Inc., 203 B.R. 547 (Bankr. S.D.N.Y. 

1997). See also, Mission Iowa Wind Co. v. Enron Corp., 291 B.R. 39, 43 (S.D.N.Y. 2003) (where 

there is any possibility of self-dealing, it is incumbent on the bankruptcy court not to defer in 

conclusory fashion to the debtor’s business judgment). Bankruptcy courts having reviewed sales 

to insiders, may look at a number of factors, including but not limited to: 

i) The nature of the sale process;

ii) Whether the assets have been exposed to the market;

iii) The transparency of the proceedings; and

iv) The fairness of the price.

It is without question that Herrera and Carter are insiders of the Debtor and MVMA 

pursuant to 11 U.S.C. § 101(31), which provides that insiders include directors, officers or other 

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persons in control of the corporate debtor. They have been the controlling directors since at least 

2015, and shared control of the corporate debtor prior to 2015 with other individuals. They are 

also the controlling directors in the new entity, MVMA. The Motion states that the transaction 

was “negotiated privately” but it is unclear who it would be negotiated with – both MVMA and 

the Debtor are controlled by the same individuals. Motion at Page 12. The proposed sale serves 

only the interests of Herrera and Carter: it enables them to move on to a new entity, MVMA, while 

leaving behind all of their debts, and additionally continuing to pay the rents to their affiliated 

insider LLC entities via the business. The only creditor who slightly benefits from the transaction 

is the IRS who may receive a portion of the amount owed. The sale has not been exposed to the 

market, as the Debtor believes there is no market to expose it to. The proceedings have not been 

transparent, and the proposed purchase price is simply a number that the Debtor has provided 

without any justification.

In W.A. Mallory Co., the debtor sought to sell assets to the sisters of the debtors’ president 

- a relationship that was fully disclosed to the court. But notwithstanding the debtor’s candor, the 

court was concerned whether the sales were truly at arm’s length or rather an attempt by the debtor 

to abuse the bankruptcy process. Exercising the higher scrutiny required for insider transactions, 

the court refused to approve the sale, explaining:

In bankruptcy, the perception of a particular proceeding is often as important as the 

reality. Since the proposed sales involve insiders as purchasers, each of the parcels 

of real estate should have been offered to the public in some fashion before the Court 

in good conscience could approve such insider sales. The debtor cannot simply 

represent that there is no public, non-insider interest in the subject properties. The 

debtor must show the Court that the properties are being sold for the highest 

attainable price The debtor has failed to carry its burden of proof of demonstrating 

that the sales, are proposed in good faith. The debtor has also failed to give the Court 

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any means by which it can measure the fairness and reasonableness of the proposed 

sales.

In re W.A. Mallory Co., 214 B.R. at 837.

The same reasoning applies here. The perception of the sale here is as important as the reality. 

Since the proposed sale is to another entity owned and controlled by the same individuals that own 

and control the Debtor, the assets should have first been marketed and offered to the public in 

some fashion.

Lastly, the Debtor has not shown that the sales price is fair and reasonable. The Debtor 

provides no efforts to market the practice to any other bidders or providers (as per the filings with 

the UST, Herrera and Carter are not the sole medical providers for the Debtor). The Debtor does 

not provide any analysis or valuation for the business beyond a statement that “[t]he Debtor 

believes that the proposed sale of the Assets and assignment of the Assigned Contracts to the Buyer 

provides the best value for such business assets and represents the likely highest and best offer 

available to the Debtor.” Motion at page 17. Debtor scheduled accounts receivable as of the 

Petition Date in the amount of $590,92200. Schedule A/B, Docket 35. Debtor has listed secured 

claims in the amount of $4,332,110.00, though it lists some of these as disputed, in its Schedule 

D. Schedule D, Docket 35. The IRS is listed at $2,150,000 and additional business loans with 

liens in the accounts receivable are listed in excess of $2.1 million. While the bulk of the unsecured 

debt listed on Schedule E/F is owed to insiders, there is still approximately $1 million or more 

owed to non-insiders, taxing authorities and other creditors. Schedule E/F, Docket 35. 

During the operating period from July 10 through August 31, 2020, officer compensation 

totaled $92,939.05. Periodic Monthly Operating Report, Docket 69. There are only two officers 

for the Debtor. The exact payroll has been requested to determine the amounts paid to the officers 

and shareholders but has not been provided to date. Rents were also paid for the various properties, 

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some of which are owned by insider LLCs and some of which are leased from third parties, totaling 

$181,937.98, and which amount includes rent paid to Laurel Hill Site Center, LLC and Springfield 

Development Group, LLC. These specific leases are to be assumed by the Motion, and the entities 

are creditors in the Bankruptcy.

Under the proposed purchase price of $700,000, once the administrative costs are 

addressed, the net proceeds to creditors will essentially be de minimis with mainly the IRS 

receiving a small portion of its claim. The Debtor has failed to show that the assets are being sold 

for the highest attainable price and have failed to give the Court any means by which to measure 

the fairness and reasonableness of the proposed sale. The Debtor has also not proposed a sale 

which is supported by a valuation, nor is it subject to any higher or better offers or a bid process. 

Under these circumstances, the Debtor has not carried its burden of proving that the sale is 

proposed in good faith.

WHEREFORE, John P. Fitzgerald, III, Acting United States Trustee UST, Region 4, 

respectfully requests that the Court sustain this objection, deny the Motion to Sell, and grant such 

other relief as the Court may deem appropriate.

Respectfully submitted,

JOHN P. FITZGERALD, III

Acting United States Trustee, Region 4

/s/ Michael T. Freeman

Michael T. Freeman 

Asst. United States Trustee

Office of the United States Trustee

1725 Duke Street, Suite 650

Alexandria, VA 22314

(703) 557-7274- Direct Dial

(202) 934-4174- Office Cell

Michael.T.Freeman@usdoj.gov

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CERTIFICATE OF SERVICE

I HEREBY certify that on this 3rd day of November, 2020, a copy of the Objection was 

served via ECF notification to: 

Kevin O’Donnell, counsel for the Debtor @ kmo@henrylaw.com

Michael G Wolff, Subchapter V Trustee @ mwolff@wolawgroup.com

I further certify that a true copy of the foregoing Objection was mailed first class mail, 

postage pre-paid, to the following parties: 

Medical Associates of Mt. Vernon, P.C.

8988 Lorton Station Blvd., Suite 100

Lorton, VA 22079

/s/ Michael T. Freeman

Michael T. Freeman 

Asst. United States Trustee

Office of the United States Trustee

1725 Duke Street, Suite 650

Alexandria, VA 22314

(703) 557-7274- Direct Dial

(202) 934-4174- Office Cell

Michael.T.Freeman@usdoj.gov

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