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Florida Business Can’t Use Chapter 11 to Escape Termination of Provider Contracts with the Government

Hospital_A rehabilitation center in St. Petersburg sought to challenge a federal agency’s decision to terminate its contracts with the center by arguing the matter as part of the center’s Chapter 11 bankruptcy case. Although a bankruptcy judge sided with the center and issued an injunction blocking the agency from terminating its agreements with the center, the U.S. District Court for the Middle District of Florida overturned that decision and erased the injunction, deciding that another federal statute barred the bankruptcy court from deciding the dispute between the center and the agency unless the agency first exhausted its administrative options.

The Rehabilitation Center of St. Petersburg was a facility that predominantly provided its services to patients who received assistance through Medicare and Medicaid. These patients made up roughly 90% of its business. Arrangements regarding payment for services were secured through a series of provider agreements between the center and the government.

In early 2014, the Florida state agency responsible for surveying nursing homes surveyed the center three times. Each time, the state found the center to be deficient. Based on these reviews, the federal government sought to terminate its contracts with the center. The center tried to fight the termination decision in federal court, but a district judge ruled in favor of the government because the center had not exhausted its administrative remedies as required by federal law.

Less than one hour after the district judge issued that ruling, the center filed a Chapter 11 bankruptcy petition. The center sought to use the bankruptcy case to, once again, argue for an order blocking the government from wiping out the provider contracts. The center argued, and the bankruptcy judge agreed, that the center’s agreements with the federal government were part of the center’s bankruptcy estate and, because of that, the bankruptcy automatic stay provision prevented the government from cancelling prior to a hearing in bankruptcy court.

After the hearing, the bankruptcy court again sided with the center and issued an injunction barring the government from terminating the agreements. Under Section 1334 of the bankruptcy code, the court had jurisdiction to hear the case, and, based upon the evidence before it, it decided that the federal government had not yet cancelled the Medicare/Medicaid contract prior to the center’s bankruptcy filing. That meant that the agreement “was an executory contract that could be assumed.”

The government appealed and won a reversal of the injunction. The bankruptcy court should not have issued the injunction because it did not have jurisdiction over the matter. The Medicare Act expressly provided that any decision made by the Secretary of the United States Department of Health and Human Services, such as HHS’ decision to terminate a provider’s Medicare/Medicaid provider contract, can only be challenged by launching an administrative appeal and then, if unsuccessful, challenging that administrative ruling in the courts.

The court pointed out that the section of the Medicare Act (42 USC 405(h)) that erected the jursidctional bar did not mention by name Section 1334 of the Bankruptcy Code, and the court also noted that the 11th Circuit Court of Appeals had not expressly ruled on whether the Medicare jurisdictional bar applied to a bankruptcy proceeding. However, the court determined that the majority of courts that had faced the issue had ruled in favor of applying the Medicare jurisdictional bar and that imposing such a bar to a Chapter 11 case like the center’s was the correct interpretation of Congress’ intent.

Sometimes, using a Chapter 11 bankruptcy can be an invaluable tool for certain businesses, depending on their circumstances. It is important to understand, though, exactly how far a bankruptcy case can, and cannot, reach. For knowledgeable advice regarding your bankruptcy case, reach out to the experienced and skilled Florida bankruptcy attorneys at Stok Folk + Kon. Our attorneys are ready and equipped to help you navigate the sometimes complex world of Chapter 11.

Contact us online or by calling (305) 935-4440 to schedule your consultation.

More blog posts:

Federal Appeals Court Approves Florida Debtor’s Chapter 11 Reorganization with Third-Party Releases, Florida Business Lawyers Blog, Nov. 20, 2015

Salon Owner’s Chapter 11 Filing Won’t Let Him Escape Million-Dollar Trademark Infringement, Cybersquatting Judgment, Florida Business Lawyers Blog, Feb. 20, 2015

Photo credit: PCHS-NJROTC at Wikimedia Commons.