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Federal Court Blocks Florida Nursing Facility’s Use of Bankruptcy Protection to Avoid Loss of Government Contracts

Nursing home corridorIn the latest chapter of a long-running dispute between the federal government and a Tampa Bay-area nursing home, the 11th Circuit Court of Appeals upheld the decision of a district court, which concluded that the protections afforded debtors in Chapter 11 bankruptcy cases do not allow the nursing home to escape the consequences of a U.S. Department of Health and Human Services decision to terminate its Medicare provider agreement with the facility. The result offers an illustration that Chapter 11 protections can be very valuable benefits, but bankruptcy protection only goes so far.

The course of events was initially put into motion after an inspection of the Bayou Shores Rehabilitation Center of St. Petersburg that found it deficient in several areas. HHS responded to this inspection by deciding to terminate all of its Medicare service provider agreements with the facility. Bayou Shores, like a lot of nursing homes, depends on Medicare and Medicaid patients for a large portion of its income, with more than 90 percent of its income coming from Medicare and Medicaid patients.

The government’s notice to Bayou informed the facility that the provider agreements would be terminated within 12 days. The facility responded by filing for Chapter 11 bankruptcy. The bankruptcy judge granted a stay in the case that prevented the government from terminating the contracts. The provider agreements were part of Bayou’s bankruptcy estate, so the Chapter 11 filing gave the bankruptcy court authority over them. The bankruptcy judge approved Bayou’s reorganization plan, which allowed the facility to keep its federal funding.

The government took the matter to a U.S. District Judge, arguing that the facility could not use the bankruptcy courts to escape the effect of the terminations, and it could only challenge the HHS decision by using the process of exhausting administrative remedies, which Bayou had not done in this case. The district court decided that the law did not give bankruptcy courts jurisdiction over the government’s decisions regarding Medicare service provider agreements, so the government could terminate the agreements.

The facility most recently took the case to the 11th Circuit, who agreed that the bankruptcy court did not have the power to stop the termination of the agreements. The court concluded that, despite some lack of clarity, the law did not permit bankruptcy courts to assume jurisdiction over Medicare claims. From the time of the enactment of the Social Security Amendments of 1939 until 1984, the law was clear that the bankruptcy courts did not have jurisdiction over Medicare claims. Congress revised the law in 1984. That revision, however, did not alter the bankruptcy courts’ jurisdiction when it comes to Medicare claims.

The 1984 revisions were a re-codification of existing law. When Congress makes revisions due to a re-codification, courts are not to interpret these revisions as making substantive changes unless Congress expressed a clear intent to make such a change. On the contrary, in this revision made in 1984, the law explicitly dictated that “none of such amendments shall be construed as changing or affecting any right, liability, status,or interpretation which existed … before that date.”

The 11th Circuit’s ruling is noteworthy because it creates a “split” among the federal appeals courts. The Ninth Circuit faced this question in 1991 and reached the opposite result, which creates the possibility that the U.S. Supreme Court may address the issue to clarify the law.

While a bankruptcy filing can help a lot of businesses facing a sudden loss of a major source of revenue, the jurisdiction problem prevented Chapter 11 from helping Bayou in this case. For other businesses, though, Chapter 11 may be an option well worth considering. However, no option, including bankruptcy, is a perfect fit in all situations. That’s where an experienced Florida bankruptcy attorney can help. The skilled Florida Chapter 11 attorneys at Stok Folk + Kon have the knowledge necessary to consider the specific details about your business and help you fashion a plan that works to meet your goals, whether with or without bankruptcy.

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

More blog posts:

Florida Business Can’t Use Chapter 11 to Escape Termination of Provider Contracts with the Government, Florida Business Lawyers Blog, May 13, 2016

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