A suit by the government under the False Claims Act is excepted from the automatic stay, according to a district judge in Nashville who followed two circuits that reached the same conclusion.

Of perhaps more significance, District Judge Kevin H. Sharp held in his March 13 opinion that the bankruptcy court does not have the exclusive right to decide whether a suit is excepted from the automatic stay.

The federal government and the State of Tennessee performed an investigation and concluded that a group of nursing homes provided grossly substandard services resulting in physical and emotional harm to patients, laying the groundwork for a suit under the False Claims Act, 31 U.S.C. §§ 3729 et seq.

Perhaps hoping to block a lawsuit by the government, the nursing homes filed chapter 11 petitions. Without first seeking modification of the automatic stay from the bankruptcy court, the state and federal governments filed a False Claims Act suit in district court, immediately followed by a motion asking the district judge to rule that the suit was excepted from the automatic stay as an exercise of police and regulatory power under Section 362(b)(4).

Judge Sharp cited lower court decisions finding no exception to the automatic stay because the government would be seeking monetary recovery under the False Claims Act. Although the Sixth Circuit is yet to address the question, he elected to follow the Eighth and Ninth Circuits, which ruled to the contrary and held that a suit by the government under the False Claims Act is within the ambit of subsection (b)(4).

The Sixth Circuit applies the pecuniary purpose and public policy tests to determine whether the (b)(4) exception applies. Judge Sharp said that the “clear majority view,” including the two circuits, holds that the exception applies, because the government is not seeking pecuniary advantage over other creditors. Although the government aims to liquidate a claim, Judge Sharp explained that the agencies would become unsecured creditors like everyone else.

Judge Sharp concluded that the suit is excepted from the stay because it also passes the public policy text, since the purpose of the suit is to deter fraudulent billing.

Judge Sharp cited lower court authority to imply that the exception to the stay would not apply in a qui tam suit brought by an individual if the government has not intervened.

The nursing homes argued that the bankruptcy court was the proper forum to decide whether (b)(4) applied. Judge Sharp rebutted this contention by citing Sixth Circuit authority for the proposition that the bankruptcy court’s exclusive authority reaches only so far as the automatic stay. The bankruptcy court’s exclusive jurisdiction does not apply when there is an exception to the automatic stay, he said.

The nursing homes also contended that the governments’ motion was procedurally defective because the plaintiffs did not follow the Bankruptcy Rules and the bankruptcy court’s local rules regarding modification of the automatic stay. Bankruptcy procedures did not apply, Judge Sharp said, because “the request for relief from a stay and an exception to the automatic stay are two different things.”

Judge Sharp’s decision is another reason hospitals and nursing homes cannot fight the government in chapter 11 to avoid being shut down. In Florida Agency for Health Care Administration v. Bayou Shores SNF LLC (In re Bayou Shores SNF LLC), 828 F.3d 1297 (11th Cir. July 11, 2016), the Eleventh Circuit held that a bankruptcy court does not have power to compel Medicare and Medicaid to continue funding. In November, the First Circuit held in Parkview Adventist Medical Center v. U.S., 842 F.3d 757 (1st Cir. Nov. 29, 2016), that the (b)(4) stay exception applies, allowing the government to cut off Medicare and Medicaid funding.

The First Circuit did not reach the issue in Bayou Shores, where the circuits are split. The Ninth Circuit had held in 1991 that a bankruptcy court can compel continued funding.

To read ABI’s discussions of Bayou Shores and Parkview, click here and here.