Bankruptcy Judge Eduardo V. Rodriguez of McAllen, Texas, wrote a template for any judge tasked with writing an opinion modifying the automatic stay to permit the government to pursue Medicaid fraud.
In his January 6 opinion, Judge Rodriguez allowed the state to prosecute a $15 million suit in state court but precluded the state from collecting a judgment.
The state filed a suit for Medicaid fraud against a dentist and his medical practice. Six years later, the dentist and his practice filed chapter 11 petitions. Somewhere along the way, the dentist stopped practicing.
The state filed a $15 million proof of claim in the bankruptcy cases, alongside a motion for a declaration that the automatic stay did not apply because the suit was a proceeding to enforce the state’s police or regulatory power under Section 362(b)(4). The state also filed an adversary proceeding to declare that the debt was nondischargeable.
There being no dispute that the state is a “governmental unit,” Judge Rodriguez primarily addressed the question of whether the suit was an exercise of police or regulatory power. He applied two tests: the pecuniary interest test and the public policy test.
If the state “acts primarily to further its financial interests, and not primarily to protect public health and safety, that action satisfies the pecuniary interest test and the automatic stay applies,” Judge Rodriguez said. The debtor chimed in, arguing that the suit promotes the state’s pecuniary interest by attempting to recover Medicaid payments.
The state countered by claiming that the pursuit of civil penalties would deter future violations by the debtors and others.
Judge Rodriguez sided with the state. He found that the state was “not acting primarily to further its pecuniary interest.” Preventing fraud, he said, is “particularly important” for a governmental program with limited resources.
Even though there was no risk of further violations because the debtors were no longer practicing medicine, Judge Rodriguez said that the suit “seeks to protect the integrity of the Texas Medicaid program through deterrence.” Therefore, the effort to recover Medicaid funds was “insignificant,” he said.
Having found that the state passed the pecuniary interest test, Judge Rodriguez turned to the public policy test. Because the suit was “not adjudicating private rights,” he ruled that the suit was not subject to the automatic stay.
Next, the debtors argued that the bankruptcy court was the proper venue to adjudicate the claim because the state had filed a $15 million proof of claim.
Judge Rodriguez summarily disposed of the argument by quoting 28 U.S.C. § 1452(a). It provides that a “party may remove any claim or cause of action in a civil action other than . . . a civil action by a governmental unit to enforce such governmental unit’s police or regulatory power.”
In a last gasp, the debtors asked Judge Rodriguez to enjoin the state from pursuing the suit under Section 105(a).
Judge Rodriguez cut the argument off at the knees by referring to the Bankruptcy Rules. The debtors, he said, were seeking an injunction that can only be obtained in an adversary proceeding under Bankruptcy Rule 7001(7). He therefore denied the debtors’ request for an injunction that the debtors had brought in a contested matter.
Judge Rodriguez declared that the automatic stay did not apply, but with a qualification. He quoted Section 362(b)(4), which provides that the exception to the automatic stay does not apply to “the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s or organization’s police or regulatory power.”
Judge Rodriguez allowed the suit to proceed in state court but barred the state “from taking any action to collect any judgment.”
Bankruptcy Judge Eduardo V. Rodriguez of McAllen, Texas, wrote a template for any judge tasked with writing an opinion modifying the automatic stay to permit the government to pursue Medicaid fraud.
In his January 6 opinion, Judge Rodriguez allowed the state to prosecute a $15 million suit in state court but precluded the state from collecting a judgment.
The state filed a suit for Medicaid fraud against a dentist and his medical practice. Six years later, the dentist and his practice filed chapter 11 petitions. Somewhere along the way, the dentist stopped practicing.
The state filed a $15 million proof of claim in the bankruptcy cases, alongside a motion for a declaration that the automatic stay did not apply because the suit was a proceeding to enforce the state’s police or regulatory power under Section 362(b)(4). The state also filed an adversary proceeding to declare that the debt was nondischargeable.