Affirming the bankruptcy court, a district judge in Delaware ruled that last year’s Denby-Peterson decision by the Third Circuit neither overruled nor limited the circuit’s University Medical opinion from 1992. University Medical held that the bankruptcy court has power to compel Medicare and Medicaid to continue funding health care providers in chapter 11.
In his September 9 opinion, Delaware District Judge Richard G. Andrews upheld Bankruptcy Judge John T. Dorsey’s confirmation of a chapter 11 plan. The decisions by Judges Andrews and Dorsey do not mean that the government will always lose. The government lost on appeal and in bankruptcy court because it made purely legal arguments and offered no evidence on critical factual questions.
The Government Cuts Off Funding
The debtor performed laboratory tests for Medicare and Medicaid. Twice before bankruptcy, the government issued notices suspending payments based on allegations of fraud on eight claims. The company filed a chapter 11 petition about six weeks after the second notice.
The debtor mounted an adversary proceeding against the government coupled with a motion for a preliminary injunction. One month into the chapter 11 case, Judge Dorsey granted the preliminary injunction, compelling the government to pay for services rendered after filing. Judge Dorsey decided that the Third Circuit’s University Medical opinion gave him both jurisdiction and power to compel payments for post-petition services. University Medical Center v. Sullivan (In re University Medical Center), 973 F.2d 1065 (3d Cir. 1992).
Judge Dorsey rejected the government’s argument that the police and regulatory exception to the automatic stay allowed the government to withhold payments.
The government appealed the preliminary injunction, but Judge Andrews dismissed the appeal for lack of jurisdiction to review an interlocutory order. The adversary proceeding seeking a permanent injunction remains pending.
The debtor sold all of its assets by the end of October and proposed a plan that was accepted by all creditor classes.
The government objected to confirmation, contesting feasibility and good faith. The government argued that the plan was infeasible because all of the assets would be distributed, leaving the government unable to recover postpetition payments if it ultimately prevails in the adversary proceeding.
By stipulation in the confirmation hearing, the government conceded that the debtor had provided valuable and necessary services after filing. The government also agreed it would not proffer evidence of post-petition fraud.
Judge Dorsey overruled the objections and confirmed the plan. The government appealed to Judge Andrews.
University Medical Remains Good Law
The government argued to Judge Andrews that confirmation was precluded by the Third Circuit’s decision in In re Denby-Peterson, 941 F.3d 115 (3d Cir. 2019). Denby-Peterson was handed down two months after the preliminary injunction. To read ABI’s report on Denby-Peterson, click here.
In Denby-Peterson, the Third Circuit joined the minority of circuits by holding that the automatic stay in Section 362(a) does not require a secured creditor to turn over property that was repossessed before bankruptcy. The circuit split will be resolved in the upcoming term of the Supreme Court when the justices rule in City of Chicago v. Fulton, 19-357 (Sup. Ct.).
Judge Andrews disagreed about the relevance of Denby-Peterson. He said that University Medical “considered the precise issue in this case — whether the automatic stay under § 362(a) prohibits the government’s post-petition withholding of Medicare payments to a healthcare provider in bankruptcy.”
Like Judge Dorsey, Judge Andrews said that Denby-Peterson dealt with the automatic turnover of property that was repossessed before bankruptcy. The Third Circuit found no automatic stay violation given the absence of an affirmative, post-petition action. Unlike Denby-Peterson, Judge Andrews said that the government did not merely retain possession of property obtained before filing. Rather, he said, the government engaged in affirmative actions to exercise control over post-petition property.
Judge Dorsey ruled that University Medical “remains good law and binding precedent recognizing that withholding of Medicare payments for post-petition services performed by a healthcare provider in bankruptcy constitutes a violation of the automatic stay.”
Failures of Proof Doom the Government’s Legal Theories
The government fared no better by arguing that the plan was infeasible and filed in bad faith. The feasibility argument was based on the idea that the debtor would have no money left to repay the government if the debtor loses the adversary proceeding.
The government’s legal theories failed for failure of proof.
The government contended that it would have an administrative claim if it won the adversary proceeding. However, the government presented no evidence to the bankruptcy court backing up the notion that it would have an administrative claim. To the contrary, the government stipulated that the debtor had not engaged in post-petition fraud.
Unlike a claim filed under Section 502, there is no presumption of validity for an administrative claim under Section 503. For lack of proof, Judge Andrews upheld Judge Dorsey’s conclusion that the plan was feasible.
The government’s good faith contention failed for largely the same reason.
Judge Andrews said the government “failed to offer any legal authority or theory that would support an entitlement to the return of [payments made as a consequence of the preliminary injunction].” He added that the government “failed to introduce any evidence that the Debtors were deliberately seeking to avoid the Government’s claim or to moot an appeal [from the outcome of the adversary proceeding].” He observed that “[a]dministering a liquidation case as quickly as possible is hardly unusual.”
Seeing no error in the finding of good faith, Judge Dorsey upheld confirmation.
Affirming the bankruptcy court, a district judge in Delaware ruled that last year’s Denby-Peterson decision by the Third Circuit neither overruled nor limited the circuit’s University Medical opinion from 1992. University Medical held that the bankruptcy court has power to compel Medicare and Medicaid to continue funding health care providers in chapter 11.
In his September 9 opinion, Delaware District Judge Richard G. Andrews upheld Bankruptcy Judge John T. Dorsey’s confirmation of a chapter 11 plan. The decisions by Judges Andrews and Dorsey do not mean that the government will always lose. The government lost on appeal and in bankruptcy court because it made purely legal arguments and offered no evidence on critical factual questions.
The Government Cuts Off Funding
The debtor performed laboratory tests for Medicare and Medicaid. Twice before bankruptcy, the government issued notices suspending payments based on allegations of fraud on eight claims. The company filed a chapter 11 petition about six weeks after the second notice.
The debtor mounted an adversary proceeding against the government coupled with a motion for a preliminary injunction. One month into the chapter 11 case, Judge Dorsey granted the preliminary injunction, compelling the government to pay for services rendered after filing. Judge Dorsey decided that the Third Circuit’s University Medical opinion gave him both jurisdiction and power to compel payments for post-petition services. University Medical Center v. Sullivan (In re University Medical Center), 973 F.2d 1065 (3d Cir. 1992).
Judge Dorsey rejected the government’s argument that the police and regulatory exception to the automatic stay allowed the government to withhold payments.