In Re Bayou Shores SNF, LLC: Another Limitation on the Limited Jurisdiction of the Bankruptcy Courts?

Medicare and Medicaid reimbursement payments are the principal source of revenue for many hospitals and nursing facilities. These sources of revenue can be particularly important to distressed healthcare providers who seek reorganization under the Bankruptcy Code. Because governmental determinations regarding Medicare and Medicaid provider agreements are governed by the Social Security Act, 42 U.S.C. § 301 et seq., the interplay between the Medicare jurisdictional restrictions set forth in 42 U.S.C. § 405(h)[1] with respect to such determinations and the bankruptcy jurisdiction grant of 28 U.S.C. § 1334 can be of critical importance in healthcare bankruptcy cases.

In a recent decision in In re Bayou Shores SNF, LLC, Case No.: 8:14-cv-02816 (M.D. Fla. June 26, 2015), the United States District Court for the Middle District of Florida (the “District Court”) addressed a bankruptcy court’s jurisdiction to enjoin the government’s termination of the debtor’s Medicare and Medicaid provider agreements and to authorize the assumption of such agreements in connection with the debtor’s plan of reorganization. The District Court reversed the decision of the Bankruptcy Court and adopted the majority view that the Medicare jurisdictional restrictions set forth in 42 U.S.C. § 405(h) prohibit bankruptcy court's attempts to address issues concerning Medicare and Medicaid provider agreements.

Bayou Shores SNF, LLC (the “Debtor”) operated a skilled nursing facility in Florida. Most of the Debtor’s patients were covered by Medicare or Medicaid, reimbursements from which comprised over 90 percent of the Debtor’s revenue. Skilled nursing facilities must comply with the requirements of 42 C.F.R. Part 483, Subpart B, to receive payment under the Medicare and Medicaid programs. As part of these regulations, skilled nursing facilities are subject to surveys conducted by the Centers for Medicare and Medicaid Services (“CMS”), an agency of the United States Department of Health and Human Services. CMS may take certain actions, including termination of the Medicare and Medicaid provider agreements, if a survey reveals that a facility is not compliant with the applicable regulations.

Following several such surveys, the Debtor was cited for deficiencies and determined to be in noncompliance. Based on the results of the surveys, CMS exercised its discretion to terminate the Debtor’s Medicare provider agreement, which would also result in the termination of its Medicaid provider agreement, and notified the Debtor that the Medicare provider agreement would be terminated within 12 days. Prior to the effective date of the termination, the Debtor sought and obtained from the District Court an ex parte temporary restraining order (“TRO”) that enjoined CMS from terminating the Medicare and Medicaid provider agreements, but subsequently, the District Court dissolved the TRO and dismissed the case for lack of subject matter jurisdiction. The District Court concluded that Medicare’s jurisdictional restriction, 42 U.S.C. § 405(h), precluded the court from exercising jurisdiction over the controversy prior to the Debtor exhausting its administrative remedies.

Less than one hour after the District Court issued its dismissal order, the Debtor filed a voluntary petition for relief under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) and sought from the United States Bankruptcy Court for the Middle District of Florida (the “Bankruptcy Court”) an emergency order enjoining CMS from terminating the Debtor’s Medicare and Medicaid provider agreements.

The Bankruptcy Court ruled that (i) it had jurisdiction to consider the Debtor’s request for injunctive relief under 28 U.S.C. § 1334, which in subsection (b) grants jurisdiction over “all civil proceedings arising under title 11, or arising in or related to cases under title 11[,]” because the matter was related to the bankruptcy case; (ii) the Debtor’s Medicare and Medicaid provider agreements were property of the estate; and (iii) the automatic stay prohibited CMS from taking action to terminate the Debtor’s Medicare and/or Medicaid provider agreements. The Bankruptcy Court also concluded that the provider agreements were not terminated prior to the Debtor’s bankruptcy filing and, therefore, were executory contracts that could be assumed by the Debtor.

CMS appealed the Bankruptcy Court’s order on the ground that the Bankruptcy Court was precluded from taking such action before the Debtor had exhausted its administrative remedies by the jurisdictional restrictions of section 405(h), which provides that “[n]o findings of fact or decision of the [Secretary of the United States Department of Health and Human Services (the “Secretary”)] shall be reviewed by any person, tribunal, or governmental agency, except as herein provided” and “[n]o action against the United States, the [Secretary], or any officer of employee thereof shall be brought under section 1331 or 1346 of title 28 to recover on any claim arising under this subchapter.” During the pendency of the appeal, the Bankruptcy Court confirmed the Debtor’s plan of reorganization, which authorized the assumption of the Medicare and Medicaid provider agreements, and CMS appealed the confirmation order on the same ground.

The District Court held that the Bankruptcy Court erred as a matter of law because the jurisdictional restrictions in section 405(h) precluded the Bankruptcy Court from delaying or preventing the effect of CMS’s determination that the provider agreements should be terminated because the Debtor had not exhausted its administrative remedies.

The District Court concluded that, with respect to a Medicare dispute, the judicial review provision of 42 U.S.C. § 405(g)[2] is the exclusive source of federal court jurisdiction. Accordingly, the Bankruptcy Court was barred from exercising jurisdiction over the dispute by section 405(h) except for conducting judicial review of the final decision of the Secretary after a hearing before the Secretary as prescribed by 42 U.S.C. § 1395cc(h)(1).[3]

Because the Debtor failed to exhaust its administrative remedies with regard to the decision terminating the provider agreements, the District Court held that, by enjoining the agreements’ termination, the Bankruptcy Court “thwarted the administrative process and allowed the debtor to circumvent its administrative obligations.” The District Court stated that the Bankruptcy Court “was without jurisdiction to interpose itself in the process, including entering an injunction to enjoin the provider agreements.”

The District Court rejected the Bankruptcy Court’s position and minority view, that section 405(h) did not bar its jurisdiction because section 405(h) fails to explicitly prohibit bankruptcy jurisdiction under 28 U.S.C. § 1334 while specifically prohibiting jurisdiction under 28 U.S.C. §§ 1331 and 1346. The District Court reasoned that section 405(h) sets forth a bar to all cases in which administrative remedies have not been exhausted, not only those in which sections 1331 or 1346 might otherwise provide jurisdiction. This is because the original version of section 405(h) referred to any action under “Section 24 of the Judicial Code of the United States,” which contained nearly every jurisdictional grant, including bankruptcy jurisdiction. When the Judicial Code was revised in 1948, the jurisdictional grants previously contained in section 24 were placed in separate sections. Technical amendments to section 405(h) in 1984 replaced “Section 24” with “section 1331 or 1346 of title 28.” Based on a statement in the legislative history that “none of such amendments shall be construed as changing or affecting any right, liability or status or interpretation which existed[,]” the District Court concluded that the jurisdictional restriction in section 405(h) applies to section 1334 as well. Notwithstanding that this reading contradicts the explicit language of section 405(h), which may require further amendment, it has been adopted as the majority view by courts.[4]

The District Court also observed that it did not need to determine the exact timing of any termination of the provider agreements (a hotly contested issue on appeal) because, even if the provider agreements had not been terminated prior to the bankruptcy filing, any action by the Bankruptcy Court to prevent or delay the effect of the Secretary’s determination, including a confirmation order approving the assumption of the provider agreements, constituted a violation of section 405(h)’s jurisdictional bar and thus exceeded the Bankruptcy Court’s subject matter jurisdiction.

Accordingly, under the current state of the law, healthcare providers contemplating bankruptcy protection should be aware that a filing may not provide an avenue for relief from a governmental determination regarding Medicare or Medicaid provider agreements, and that any such determination may pose a barrier to assumption of provider agreements if the debtor has not exhausted its administrative remedies and the determination is relevant to assumption. This is significant because a healthcare provider’s ability to assume, and in many instances assign, provider agreements under section 365 of the Bankruptcy Code is a critical aspect of the debtor’s restructuring under the Bankruptcy Code. Curtailing a bankruptcy court’s authority to approve such actions under Section 365 could significantly impair a healthcare provider’s ability to successfully reorganize. Healthcare providers should also note that a bankruptcy court’s lack of jurisdiction may extend beyond the narrow issue of termination of a provider agreement to other fundamental issues relating to a proposed assumption, including a determination regarding cure amounts in connection with such an assumption.[5]