Circuits Split on Bankruptcy Jurisdiction for Social Security, Medicare Suits

Deepening an existing split of circuits, the Fifth Circuit held that the recodification canon does not divest the bankruptcy court of subject matter jurisdiction to hear Social Security claims.

In a revised opinion on July 25 by Circuit Judge Edith Brown Clement, the Fifth Circuit joined the Ninth Circuit. On the other side of the fence, the Third, Seventh, Eighth and Eleventh Circuits held there is no bankruptcy or diversity jurisdiction over Social Security claims.

The issue is important because the same jurisdictional question looms over Medicare and Medicaid claims. As a result of the Eleventh Circuit’s opinion 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 bankruptcy court, for example, lacks jurisdiction to force the government to continue funding a hospital or nursing facility that files a chapter 11 petition. To read ABI’s report on Bayou Shores, click here.

It remains to be seen whether judges following the Fifth Circuit will conclude that the bankruptcy court has jurisdiction to force the government into funding hospitals and nursing homes in chapter 11.

The Fifth Circuit Case

A debtor allegedly received an overpayment of Social Security benefits. According to the debtor, the Social Security Administration, or SSA, was improperly withholding a portion of his Social Security benefits to recover the overpayment.

Before bankruptcy, the debtor appealed to an administrative law judge from the agency’s denial of a refund. The appeal was pending when the debtor filed a chapter 7 petition.

In bankruptcy court, the debtor sued the SSA to recover the benefits. The bankruptcy court granted the SSA’s motion to dismiss and was upheld in district court on jurisdictional grounds.

The debtor appealed to the Fifth Circuit and won a reversal reinstating the suit in bankruptcy court. The debtor was represented in the circuit by Prof. John A. E. Pottow, the John Philip Dawson Collegiate Professor of Law at the University of Michigan Law School.

The Recodification

Section 405(h) of Title 42 provides that no one may sue the government “under section 1331 or 1346 of Title 28 to recover on any claim arising under” the Social Security, Medicare or Medicaid laws until there is an exhaustion of remedies in the agency. Because jurisdiction in the bankruptcy court was based on Section 1334 — not Sections 1331 or 1346 — the plain language of the statute would seem to allow the suit in bankruptcy court. But it’s not so simple.

From 1939 to 1984, bankruptcy courts lacked jurisdiction over SSA claims because Section 405(h), as adopted in 1939, deprived federal courts of jurisdiction “under section 26 of the Judicial Code.” At the time, Section 26 contained virtually all of the grants of jurisdiction to federal courts, including bankruptcy and diversity jurisdiction.

In 1948, Congress recodified Section 26, establishing jurisdictional grants in Section 1331 for federal questions, Section 1332 for diversity, Section 1346 for suits against the government, and Section 1334 for bankruptcy. However, Congress did not get around to correcting Section 405(h) until 1984. In the intervening years, Section 405(h) continued referring to “section 26 of the Judicial Code” and was interpreted to mean there was no bankruptcy or diversity jurisdiction over Social Security, Medicare and Medicaid disputes.

Congress eventually recodified Section 405(h) in a technical corrections bill in 1984, resulting in the statute as it now reads, depriving federal courts of jurisdiction over Social Security, Medicare and Medicaid disputes under Sections 1331 and 1346. Pointedly, the recodification did not list Section 1334, the grant of bankruptcy jurisdiction, or 1332, for diversity jurisdiction.

The legislative history said that the bill was intended only to correct “technical errors.” The bill itself contained a provision saying that none of the amendments “shall be construed as changing or affecting any right, liability, status, or interpretation which existed (under the provisions of law involved) before” the amendments’ effective date.

The Doctrine of Recodification Error

In the late nineteenth century, the Supreme Court pronounced the doctrine of recodification error, proclaiming that a recodification does not effect a substantive change without a clear expression of congressional intent.

The Third, Seventh, Eighth and Eleventh Circuits held that the omission of Sections 1332 and 1334 from Section 405(h) was a mistake in recodification and continued to hold that there was no bankruptcy or diversity jurisdiction.

A circuit split arose in 1991 when the Ninth Circuit handed down In re Town & Country Home Nursing Services Inc., 963 F.2d 1146 (9th Cir. 1991), and held that Section 405(h) did not prohibit the exercise of bankruptcy jurisdiction.

The Fifth Circuit Heeds Justice Scalia

Writing for the Fifth Circuit, Judge Clement didn’t buy the notion that there is “a hidden jurisdictional bar” resulting from a mistake in recodification. She said the doctrine only applies “in the absence of a clear indication from Congress that it intended to change the law’s substance.” She said that the clear indication of congressional intent is contained in the “actual words” of the statute.

Judge Clement cited Reading Law: The Interpretation of Legal Texts, a book by the late Justice Antonin Scalia. He said that the “new text is the law . . . even when the legislative history . . . expresses the intent to make no change.”

Judge Clement interpreted Section 405(h) “to mean what it says. And it says nothing about Section 1334.” Given the language of the statute, she said that the recodification canon cannot “trump the clear text.”

The debtor did not win outright, however. A different sentence in Section 405(h) provides, “No findings of fact or decision of the Commissioner of Social Security shall be reviewed by any person, tribunal, or governmental agency except as” provided in Section 405(g). She went on to say that channeling into Section 405(g) “applies only where the would-be plaintiff is challenging a decision regarding his entitlement to benefits.”

Judge Clement remanded for the bankruptcy court to determine whether there is jurisdiction. She said there would not be jurisdiction if the debtor’s claims were “primarily about his entitlement to benefits.” The bankruptcy court would have jurisdiction, she said, if the debtor was making a “claim for money because the [Social Security Administration] failed to comply with its own regulations in recouping the overpayment.”

Prof. Pottow’s Observations

Prof. Pottow told ABI, “This is an area of flux.

“Earlier decisions were more confident brushing away the text. We now live in a different world of statutory interpretative methodology, so the [Eleventh Circuit’s Bayou Shores opinion] had to do much heavier lifting to combat the text, resorting gamely to something called the recodification canon.

“The Fifth Circuit has just taken the wind out of those sails, holding that properly applied, the recodification canon cannot bear such weight, and the text is the text.” With regard to Medicare, he said “it’s not obvious how their standard applies there.”

The Modified Opinion

Judge Clement handed down her original opinion on May 10, prompting the government to file a motion for rehearing en banc on July 15. The rehearing motion led Judge Clement to issue her modified opinion on July 25. The new opinion did not alter the original version except with regard to the description of the issue for the bankruptcy court to decide on remand.

The government could file another petition for rehearing en banc or a petition for certiorari to the Supreme Court. ABI will report if the government takes another bite at the apple.