In re RGV Smiles by Rocky L. Salinas D.D.S. P.A., Case No: 20-70209

CourtUnited States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Texas
Writing for the CourtEduardo V. Rodriguez, United States Bankruptcy Judge
Citation626 B.R. 278
Decision Date06 January 2021
Docket NumberCase No: 20-70209, Case No: 20-70210
Parties IN RE: RGV SMILES BY ROCKY L. SALINAS D.D.S. P.A., et al Rocky Lamar Salinas, D.D.S.; dba RGV Smiles by Rocky L. Salinas D.D.S. P.A.; aka Compassionate Healthcare Services Debtors

626 B.R. 278

IN RE: RGV SMILES BY ROCKY L. SALINAS D.D.S. P.A., et al

Rocky Lamar Salinas, D.D.S.; dba RGV Smiles by Rocky L. Salinas D.D.S. P.A.; aka Compassionate Healthcare Services Debtors

Case No: 20-70209
Case No: 20-70210

United States Bankruptcy Court, S.D. Texas, McAllen Division.

Signed January 6, 2021


626 B.R. 281

J. Casey Roy, Noah Reinstein, Assistant Attorneys General, for State of Texas

Joyce Williams Lindauer, Joyce W. Lindauer Attorney, PLLC, Dallas, TX, for Debtors.

MEMORANDUM OPINION

Eduardo V. Rodriguez, United States Bankruptcy Judge

This case pits the policies underlying the Bankruptcy Code against one another. The Code is designed to shield debtors from creditors and to protect the public from debtor conduct that impacts public health, safety, and welfare. While those policies are not always in tension, here, the Court must decide how to balance those policies. On December 22, 2020, the Court conducted a final hearing on the State of Texas's expedited motion to determine the non-applicability of the automatic stay. For the reasons set forth below, this Court finds that the motion should be granted in part.

I. Procedural History

1. In 2014, the State of Texas commenced an action under the Texas Medicaid Fraud Prevention Act ("TMFPA ") pursuant to Texas Human Resources Code §§ 36.001 –.132, styled State of Texas v. Dr. Behzad Nazari, D.D.S. d/b/a Antoine Dental Center, et al. , Cause No. D-1-GN-14-005380, in the District Court of Travis County, Texas, 53rd Judicial District ("State Court Action ").1 Both RGV Smiles by Rocky L. Salinas, D.D.S. P.A. ("RGV Smiles ") and Rocky Lamar Salinas ("Dr. Salinas " and together with RGV Smiles, "Debtors ") were named defendants in the action.2

2. On June 30, 2020, both RGV Smiles and Dr. Salinas filed their initial petitions and schedules under chapter 11, title 11 of the United States Code.3

3. On July 1, 2020, Debtors each filed a Suggestion of Bankruptcy in the
626 B.R. 282
State Court Action.4

4. On July 20, 2020, this Court entered its order granting joint administration of the two bankruptcy proceedings.5

5. On October 13, 2020, the State of Texas filed the instant "State of Texas’ Expedited Motion to Determine Nonapplicability of the Automatic Stay Pursuant to 11 U.S.C. § 362(b)(4) ("Motion to Determine " or "Motion ").6

6. On October 19, 2020, Debtors filed their objection to the Motion to Determine.7

7. On October 21, 2020, the Court conducted a preliminary hearing on the Motion to Determine and continued the matter to November 18, 2020, for a final hearing and ordered briefing by November 11, 2020.8

8. On October 28, 2020, the State of Texas filed an adversary complaint against Debtors pursuant to 11 U.S.C. §§ 523(a)(2), 523(a)(7) and 1141(d)(6)(A).9 On the same date, the State of Texas filed a proof of claim in the amount of $15,000,000.10

9. On November 10, 2020, and at the parties’ request, the Court held a status conference. The parties announced that they would like to proceed to nonbinding mediation.11 A hearing on the Motion to Determine was reset to December 22, 2020, and the briefing deadlines were extended to December 15, 2020.12

10. On November 18, 2020, the parties filed a joint motion to mediate.13 This Court granted the motion and appointed the Honorable Leif M. Clark as mediator.14

11. On December 10, 2020, Debtors filed an objection to the State of Texas's proof of claim.15

12. On December 22, 2020, the Court held a status conference wherein the parties announced that the mediation resulted in an impasse.16 On this same date, the Court conditionally approved the Amended Disclosure statement and took the Motion to Determine under advisement.17

II. Jurisdiction and Venue

This Court holds jurisdiction pursuant to 28 U.S.C. § 1334, which provides "the district courts shall have original and exclusive jurisdiction of all cases under title 11." Section 157 allows a district court to "refer" all bankruptcy and related cases to the bankruptcy court, wherein the latter court will appropriately preside over the matter.18 This court determines that pursuant

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to 28 U.S.C. § 157(b)(2)(A) and (G), this proceeding contains only core matters.

This Court may only hear a case in which venue is proper.19 28 U.S.C. § 1409(a) provides that "a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending." Both RGV Smiles primary place of business and Dr. Salinas's principal residence are in McAllen, Texas. Their jointly administered chapter 11 cases are presently pending in this Court. Therefore, venue of this proceeding is proper.

III. Constitutional Authority to Enter a Final Order

This Court has an independent duty to evaluate whether it has the constitutional authority to sign a final order.20 In Stern , which involved a core proceeding brought by the debtor under 28 U.S.C. § 157(b)(2)(C), the Supreme Court held that a bankruptcy court "lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim."21 As indicated above, the pending matter before this Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (G). The ruling in Stern was limited to the one specific type of core proceeding involved in that dispute, which is not implicated here. Additionally, in Stern , the debtor filed a counterclaim based solely on state law. Here, the State of Texas's Motion is based on 11 U.S.C. § 362(b)(4) of the United States Bankruptcy Code. A similar provision does not exist under state law. Accordingly, the narrow limitation imposed by Stern does not prohibit this Court from entering a final order here.22

IV. Analysis

In its Motion to Determine, the State of Texas asks this Court to enter an order confirming that: (1) the State Court Action is excepted from the automatic stay pursuant to 11 U.S.C. § 362(b)(4) ; and (2) the State of Texas is authorized to continue the prosecution of the State Court Action in all respects.23 The State of Texas acknowledges that "the provisions of Bankruptcy Code section 362(a) generally operate as a stay of, among other things, the commencement or continuation of an action or proceeding against a debtor to recover a claim that arose prior to bankruptcy."24 However, it argues, "the TMFPA action brought by the State is an enforcement action, and thus the police and regulatory exception found in 11 U.S.C. § 362(b)(4) applies to except the

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State Court Action from the automatic stay, which allows a state trial court to hear a police or regulatory matter pending before it."25 The Court will consider each argument in turn.

1. Whether the police and regulatory exception of 11 U.S.C. § 362(b)(4) applies.

Upon the filing of a bankruptcy petition, 11 U.S.C. § 362(a) stays all judicial and administrative proceedings and collection efforts against a debtor and the debtor's estate. The automatic stay is intended to "protect debtors and creditors during the pendency of a bankruptcy proceeding to ensure that debtors get appropriate relief and that creditors receive payment in a fair and orderly manner."26 Subsection (b) "establishes certain exceptions to the automatic stay provisions."27 Under those exceptions, § 362 does not operate as a stay.28

Pursuant to § 362(b)(4), the subsection at issue in this case:

the commencement or continuation of an action or proceeding by a governmental unit ... to enforce such governmental unit's or organization's police and regulatory power, including 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[,]

is excepted from the automatic stay.29 This exception helps balance the policy underlying the automatic stay by "ensur[ing] that debtors do not use a declaration of bankruptcy to avoid the consequences of their actions that threaten the public interest."30 For § 362(b)(4) to apply, the Court must determine that the entity invoking the exception is a governmental unit pursuant to § 101(27).31 If it is, then the Court must find that the entity is seeking to enforce its police or regulatory power.32

a. Governmental Unit

The Bankruptcy Code defines "governmental unit" as "United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title) ...."33 It is undisputed that the State of Texas falls squarely within that definition. The Court now turns to whether the State Court Action is an act by the State of Texas to enforce its police or regulatory power.

b. Exercise of Police or Regulatory Power

Courts employ two...

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2 practice notes
  • Glaspell v. United States (In re Glaspell), Case No.: 5:17-bk-00301
    • United States
    • United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Northern District of West Virginia
    • 20 Enero 2021
    ...West Virginia equitable subrogation law. In addition, this case is distinguishable from Donohew . While West Virginia courts may generally 626 B.R. 278 apply equitable subrogation to a person or entity that pay the bills of another, they expressly require that a "relationship of principal a......
  • Kupperstein v. Schall (In re Kupperstein), No. 20-1472
    • United States
    • United States Courts of Appeals. United States Court of Appeals (1st Circuit)
    • 22 Abril 2021
    ...Act case to recover improper government payments to debtor); In re RGV Smiles by Rocky L. Salinas D.D.S. P.A., Nos. 20-70209, 20-70210, 626 B.R. 278, 287–88 (Bankr. S.D. Tex. Jan. 6, 2021) (applying police power exception to state Medicaid fraud statute to permit government to pursue funds ......
2 cases
  • Glaspell v. United States (In re Glaspell), Case No.: 5:17-bk-00301
    • United States
    • United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Northern District of West Virginia
    • 20 Enero 2021
    ...West Virginia equitable subrogation law. In addition, this case is distinguishable from Donohew . While West Virginia courts may generally 626 B.R. 278 apply equitable subrogation to a person or entity that pay the bills of another, they expressly require that a "relationship of principal a......
  • Kupperstein v. Schall (In re Kupperstein), No. 20-1472
    • United States
    • United States Courts of Appeals. United States Court of Appeals (1st Circuit)
    • 22 Abril 2021
    ...Act case to recover improper government payments to debtor); In re RGV Smiles by Rocky L. Salinas D.D.S. P.A., Nos. 20-70209, 20-70210, 626 B.R. 278, 287–88 (Bankr. S.D. Tex. Jan. 6, 2021) (applying police power exception to state Medicaid fraud statute to permit government to pursue funds ......

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