Intrepid U.S.A. Inc. and its affiliates operate as home health care providers and nurse and medical staffing providers through approximately 5,766 employees in 100 locations in 31 states, primarily in the Midwest, South and Southeastern United States. Intrepid serves the elderly, homebound, disabled and other disadvantaged individuals, providing in-home nurses, therapists and administrators. It is currently in bankruptcy in Minneapolis.
One of the most troubling issues facing the estate is a pending qui tam case alleging fraud against the Medicare program filed by two whistleblowers in the federal district court in Minneapolis. As counsel experienced in such matters will know, such complaints are filed under seal, so that even the defendant does not know of its existence. The government has a short period of time to decide whether to take over the case or decline to do so, but the government usually and easily obtains extensions of that deadline. When a health care entity files a bankruptcy petition, the automatic stay most likely does not apply to these cases because of the exception of §362(b)(4) to police and regulatory acts. In re Commonwealth Co., 913 F.2d 518 (8th Cir. 1990). However, the amount in controversy can be substantial. Perhaps more important even than the amount in controversy, is the uncertainty of the amount of the claim. Failure to promptly resolve these kinds of government claims may doom a debtors’ reorganization efforts.
These unresolved claims for Medicare fraud pose risks to what is frequently a health care debtor’s most significant stream of payments, and also create a risk for any potential buyer of the debtor’s assets. Part of the problem is that the government asserts a right of recoupment for any overpayments made to Medicare providers. Compare In re University Medical Ctr., 973 F.2d 1065 (3d Cir. 1992), with Sims v. U.S. Dept. of Health and Human Servs. (In re TLC Hospitals Inc.), 224 F.3d 1008 (9th Cir. 2000). Recoupment rights are generally not subject to the automatic stay, In re St. Johns Home Health Agency Inc., 173 B.R. 238 (Bankr. S.D. Fla. 1994) (Medicare adjustments are recoupment and not subject to the automatic stay); but, see In re Memorial Hosp., 82 B.R. 478 (W.D. Wis.), appeal dismissed, 862 F.2d 1299 (7th Cir. 1988); and may have the effect of elevating what are otherwise unsecured claims to secured status. (A creditor’s right to setoff is converted to a secured claim in any monies owed to the debtor, pursuant to 11 U.S.C. §506(a). See In re Nuclear Imaging Systems Inc., 260 B.R. 724, 729–30 (Bankr. E.D. Pa. 2000). However, whether the same result applies to recoupment is uncertain. Because recoupment rights are a defense rather than a claim, some courts have held that a creditor asserting a right of recoupment is not a secured creditor. See In re Clemens, 261 B.R. 602 (Bankr. M.D. Pa. 2001) (holding that a creditor with a right of recoupment is not a secured creditor because §506(a) only refers to claims “subject to setoff under §553”); In re Lawrence United Corp., 221 B.R. 661, 669 (Bankr. N.D.N.Y. 1998) (“any right of recoupment [a creditor] may have does even not fall under the broadest interpretation of an ‘interest’ in property.”). Moreover, the government may assert that its recoupment rights are unaffected by any subsequent discharge in bankruptcy. In re Flagstaff Realty Assocs., 60 F.3d 1031, 1035–36 (3d Cir. 1995) (recoupment survives discharge even if creditor did not object to plan or seek a stay pending appeal; but, see In re Kings Terrace Nursing Home & Health Facility, 184 B.R. 200 (S.D.N.Y. 1995) (Medicaid recoupment is a claim within the meaning of the Bankruptcy Code; hence, a right to recoupment is barred by the discharge), aff’g., 1995 WL 65531 (Bankr. S.D.N.Y. Jan. 27, 1995). Finally, the government takes the position that any assignee of a Medicare provider number is subject to a statutory and regulatory right of recoupment. See, e.g., United States v. Vernon Home Health Inc., 21 F.3d 693, 696 (5th Cir. 1994). Thus, as a practical matter, no buyer will purchase a going-concern health care business that necessarily includes Medicare provider numbers, and no lender in a recapitalization will lend substantial sums of money in reliance of accounts receivable as collateral unless and until the government’s claims are resolved.
The debtor in Intrepid has demonstrated a method to flush out and resolve these kinds of government claims, and probably more quickly than one could do outside of bankruptcy. In Intrepid, the government had failed to decide whether to intervene in a qui tam case almost two years after the qui tam case was filed. Intrepid filed its bankruptcy petition and (after granting the government numerous extensions to allow settlement discussions) compelled the government to file a proof of claim disclosing the existence of the qui tam case, providing a copy of the complaint to the debtor and placing the claim’s amount and validity before the bankruptcy court for determination. The government filed identical proofs of claim (the “claims”) in the 57 Intrepid cases for allegedly submitting or causing to be submitted for payment by the government false or fraudulent claims, thereby violating the False Claims Act, 31 U.S.C. §3729–3733 (FCA), the Civil Monetary Penalties Law, 42 U.S.C. §1320a–7a; the Program Fraud Civil Remedies Act, 31 U.S.C. §3801–38012; and, asserting common law doctrines of payment by mistake, unjust enrichment, fraud and equity. Although the government had been aware of these allegations for almost two years, the claims were filed as “unliquidated.”
The debtors promptly objected to the claims pursuant to 11 U.S.C. §502(b), which provides that a court shall determine the amount of such claim and shall allow such claim in such amount except to the extent that it is unenforceable against a debtor under any agreement or applicable law. Intrepid argued that the bankruptcy court should disallow the claims on the grounds that:
- The government failed to state the claims with sufficient particularity to survive a motion to dismiss under Rule 9(b) of the Federal Rules of Civil Procedure (FRCP), as incorporated into contested matters by Rules 7009 and 9014(c) of the Federal Rules of Bankruptcy Procedure (FRBP);
- The government failed to identify any Medicare claims submitted by the debtors that were false or fraudulent, as required under the FCA, 31 U.S.C. §3729(a);
- The government had not alleged the scienter element of the FCA, 31 U.S.C. §3729(b);
- Although the government alleged the debtors participated in widespread, systemic practices that resulted in overpayments, the debtors had shown that no such systemic problems occurred; and
- The claims inappropriately relied on the qui tam complaint, which was not evidence.
In the alternative, the debtors requested that the bankruptcy court estimate the allowed amount of the claims for all purposes, including for purposes of cure amounts in connection with assumption or assignment of the Medicare provider agreements, allowance of administrative claims, and allowance, treatment and discharge under any joint reorganization plan filed in the cases.
Although as of the end of 2004 there is no resolution of the objection to the claims, by compelling the government to file a claim or lose its right to a payment on that claim, the debtors in Intrepid have been able to force the government’s hand in the qui tam action. Rather than being at the mercy of the government, which might have taken years more to resolve the issues, by compelling the filing of a claim, the government was forced to disclose the existance of the suit and provide a copy of the complaint to the debtors. By filing an objection to the claims, the debtors were able to force the government to prove the claim in bankruptcy court, and to do so in a much more expiditous manner than could have been compelled outside of bankruptcy court.