Azar v. True Health Diagnostics, LLC (In re THG Holdings LLC)
| Decision Date | 27 March 2020 |
| Docket Number | Adv. No. 19-50280 (JTD),Civ. No. 19-1714 (RGA),Case No. 19-11689 (JTD) |
| Parties | In re: THG HOLDINGS LLC, et al., Debtors. ALEX M. AZAR II, in his official capacity as Secretary, United States of Department of Health and Human Services; and Seema Verna, in her official capacity as Administrator, Centers for Medicare and Medicaid Services, Appellants-Defendants, v. TRUE HEALTH DIAGNOSTICS, LLC, Appellee-Plaintiff. |
| Court | U.S. District Court — District of Delaware |
Jointly Administered
MEMORANDUMJoseph H. Hunt, Assistant Attorney General, David C. Weiss, United States Attorney, Ellen W. Slights, Assistant United States Attorney, Wilmington, Delaware; Ruth A. Harvey, Lloyd H. Randolph, John J. Siemietkowski, United States Department of Justice, Washington, D.C., attorneys for the Appellants-Defendants.
Derek C. Abbott, Daniel B. Butz, Morris Nichols Arsht & Tunnell LLP, Wilmington, Delaware; Eric E. Walker, Brian A. Audette, David J. Gold, Perkins Coie LLP, Chicago, Illinois, attorneys for Appellee-Plaintiff.
This matter arises from an appeal filed by the United States, on behalf of Alex M. Azar, II, Secretary of HHS, and Seema Verma, Administrator for the Centers for Medicare and Medicaid Services ("CMS," and together with HHS, the "Defendants"). Defendants have appealed the Bankruptcy Court's August 29, 2019 Order Enforcing the Automatic Stay (Adv. D.I. 28)1 ("Order") and accompanying Memorandum Opinion (Adv. D.I. 27), True Health Diagnostics, LLC v. Azar (In re THG Holdings LLC), 604 B.R. 154 (Bankr. D. Del. 2019). The Order granted a motion filed by debtor True Health seeking to enforce the Bankruptcy Code's automatic stay in connection with CMS's withholding of Medicare payments for post-petition services rendered by True Health. Pending before the Court is True Health's Motion to Dismiss the Appeal. (D.I. 16). Defendants argue that the Order is interlocutory, Defendants failed to seek leave to file the appeal pursuant to Federal Rule of Bankruptcy Procedure 8004(a), and the issues raised do not otherwise meet the criteria warranting interlocutory appeal. For the reasons set forth below, the Court will (i) grant Defendants' Motion for Leave to File Surreply (D.I. 33) and (ii) grant True Health's Motion to Dismiss.
On May 30, 2017, True Health received a Notice of Suspension of Medicare Payments dated May 26, 2017 (the "2017 Suspension Notice") from CMS. (Adv. D.I. 1). The 2017 Suspension Notice informed True Health that CMS had suspended 100% of Medicare paymentsto True Health as of May 25, 2017 pursuant to 42 C.F.R. § 405.371(a)(2) on the basis of "credible allegations of fraud," which the letter explains can come from "any source" including "fraud hotline complaints." The 2017 Suspension Notice cited eight specific claims submitted over a one-year period that did not comply with Medicare guidelines. The eight claims represent 0.008% of all claims submitted by True Health to Medicare during the relevant time period. On June 13, 2019, True Health received a second suspension notice (the "2019 Suspension Notice") from CMS imposing another 100% payment suspension of Medicare payments to True Health. This second suspension was based upon five of the same claims - all with 2017 service dates - that were reviewed as part of the original 2017 suspension and investigation. Id.
Soon after, on July 30, 2019 (the "Petition Date"), True Health and certain of its affiliates filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. (See B.D.I. 1). The same day, True Health filed a complaint against Defendants, initiating an adversary proceeding which asserted that CMS was violating § 362(a) of the Bankruptcy Code by continuing to withhold payments for services rendered by True Health post-petition. True Health simultaneously filed a motion for preliminary injunction seeking to enforce the automatic stay and enjoin Defendants from withholding Medicare payments owed to True Health in bankruptcy. (See Adv. D.I. 1, 3, 4).
The parties fully briefed the preliminary injunction motion, and on August 22, 2019, the Bankruptcy Court held a hearing. (B.D.I. 4, 11, 13, 21, 22). On August 29, 2019, the Bankruptcy Court issued its Memorandum Opinion and entered the Order enforcing the automatic stay and ordering the Defendants to release all Medicare payments withheld post-petition and continue to make payments. (Adv. D.I. 27, 28). The Bankruptcy Court held, among other things, that it had jurisdiction under the Third Circuit's decision in University MedicalCenter v. Sullivan (In re University Medical Center), 973 F.2d 1065 (3d Cir. 1992) to enjoin CMS from withholding Medicare payments from True Health in bankruptcy, finding that "[t]he Third Circuit addressed this very issue extensively in University Medical Center, where it stated, in agreement with the Ninth Circuit, that 'where there is an independent basis for bankruptcy court jurisdiction, exhaustion of administrative remedies pursuant to other jurisdictional statutes is not required.'" 604 B.R.at 159. The Bankruptcy Court held that True Health's right to receive Medicare payments is property of its bankruptcy estate under 11 U.S.C. § 541(a), and CMS's withholding of such payments after True Health's bankruptcy filing was a violation of the automatic stay under 11 U.S.C. § 362(a). Id. at 160-61. The Bankruptcy Court rejected Defendants' contention that withholding Medicare payments to True Health fit within the police power exception to the automatic stay under 11 U.S.C. § 362(b)(4). See id. at 161. Accordingly, the Bankruptcy Court entered its Order, which, among other things, required Defendants to continue making Medicare payments owed to True Health on or after the Petition Date and required Defendants to deliver all Medicare payments withheld on or after the Petition Date to True Health within five business days. (See Adv. D.I. 28). The Order expires on the earlier of (a) entry of a final judgment in the adversary proceeding, or (b) an order terminating the relief granted under the Order. See id.
On September 9, 2019, Defendants filed a motion to stay the Order pending appeal. (Adv. D.I. 33). On September 25, 2019, after full briefing and argument, the Bankruptcy Court denied the motion to stay pending appeal. (Adv. D.I. 57).
On September 20, 2019, the Bankruptcy Court entered an order approving the sale of certain of Debtors' operating assets as a going concern, which sale closed on October 1, 2019.(B.D.I. 271). On October 30, 2019, the Bankruptcy Court entered an order approving the auction sale of most of Debtors' remaining physical assets, which sale was completed by late November 2019. (B.D.I. 432). Debtors have since discontinued providing laboratory testing services to Medicare beneficiaries and submitting claims to CMS for Medicare reimbursements. According to the Debtors, CMS has now paid virtually all claims as required under the Order. (Adv. D.I. 75 at 4). On November 26, 2019, the Bankruptcy Court entered an order confirming the Debtors' chapter 11 plan (the "Plan"), through which Debtors have transferred their remaining assets to a liquidation trust to be liquidated for the benefit of creditors. (B.D.I. 531). The Plan became effective on December 6, 2019. (B.D.I. 552).
The adversary proceeding remains pending in the Bankruptcy Court. On September 19, 2019, Defendants filed a motion to dismiss the adversary complaint, contending that the Bankruptcy Court lacks jurisdiction and that True Health fails to state a claim upon which relief may be granted. (Adv. D.I. 50). Briefing on Defendants' motion to dismiss is complete. The Bankruptcy Court has determined not to move forward with the adversary proceeding until this Court has determined the status of the appeal. (See 10/2/19 Hr'g Tr. at 16:24-17:15 (status conference on adversary proceeding)).
On December 11, 2019, True Health filed a motion to voluntarily dismiss the adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure 7041. (Adv. D.I. 75). True Health asserts that, following the asset sale, it is no longer performing lab tests or submitting claims to CMS for Medicare reimbursement, and that it has received virtually all Medicare payments owed. While the adversary proceeding "served its purpose by providing the relief necessary to facilitate a successful conclusion to these chapter 11 cases," True Health now seeks to dismiss it, as "the administrative costs of continuing this adversary proceeding outweigh any additionalbenefits to the debtors' bankruptcy estates or the liquidation trust." Defendants' deadline to respond to True Health's motion to voluntarily dismiss the adversary proceeding was extended by stipulation of the parties through April 1, 2020 (Adv. D.I. 79).
On September 12, 2019, Defendants filed a notice of appeal with respect to the Order (the "Appeal"). On September 23, 2019, Defendants filed a motion for stay of the Order pending appeal. (D.I. 9). Following a hearing on October 16, 2019 (D.I. 31), this Court denied the motion for stay. (D.I. 25). This Court agreed that University Medical Center is "binding precedent" supporting the Bankruptcy Court's exercise of jurisdiction over True Health's claims to enforce the automatic stay against Defendants. This Court found that, as in University Medical Center, the Debtor here is not challenging CMS's prepetition overpayment determination or the propriety of the 2019 fraud suspension. Rather, the Debtor is only seeking to enforce an automatic stay under section 362(a) and the Bankruptcy Court's jurisdiction over such a request exists in controlling Third Circuit law.
On September 30, 2019, True Health filed a motion to dismiss the appeal on the basis that the Order is interlocutory and Defendants failed to seek...
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