RESERVATION OF RIGHTS AND LIMITED OBJECTION OF THE...

RUTH A. HARVEY MARGARET M. NEWELL LEAH V. LERMAN Trial Attorney P.O. Box 875 Ben Franklin Station Washington, DC 20044-0875 [email protected] Telephone: 202-307-0452 Facsimile: 202-514-9163 Attorneys for United States of America

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

In re: ) Chapter 11 ) SENIOR CARE CENTERS, LLC, ET. AL., ) Case No. 18-33967-BJH

, ) ) Jointly Administered Debtors, )

) Ref: 574, 575, 576, 577, 578, 579, ) 580, 581, 582, 583, 584, 585 RESERVATION OF RIGHTS AND LIMITED OBJECTION OF THE UNITED STATES OF AMERICA TO DEBTORS’ MOTIONS TO SELL TRANSFER PORTFOLIOS [DK

NOS. 580, 581, 582, 583, 584, 585] AND MOTIONS TO COMPROMISE CONTROVERSY [DK NOS. 574, 575, 576, 577, 578, 579]

Case 18-33967-bjh11 Doc 672 Filed 03/14/19 Entered 03/14/19 15:23:49 of 40

TABLE OF CONTENTS

INTRODUCTORY NOTE ............................................................................................................. 1 FACTUAL AND PROCEDURAL BACKGROUND.................................................................... 2 REGULATORY BACKGROUND ................................................................................................ 3

I. Medicare Program ............................................................................................................. 3

II. Social Security Programs .................................................................................................. 6 ARGUMENT .................................................................................................................................. 8

I. The Motions To Sell Are Objectionable ............................................................................ 8

A. The Bankruptcy Court Lacks Subject Matter Jurisdiction Over Any Dispute Arising Under the Medicare Act (42 U.S.C. § 1395g) .......................... 8

B. The Contemplated Sales Violate Medicare Laws ............................................. 11 C. The Contemplated Sales Contravene Section 363 of the Bankruptcy Code .................................................................................................................. 13 D. The Motions to Sell Contravene Section 365 of the Bankruptcy Code ............ 18 1. Medicare Provider Agreement as Executory Contract ........................ 19 2. Attempting to Sell an Executory Contract Pursuant to Section 363(f)....................................................................................... 20 3. The Medicare Change of Ownership Process Comports with Section 365........................................................................................... 22 E. The Motions to Sell Violate the Anti-Assignment Act (41 U.S.C. § 6305) ...... 24 F. The Motions to Sell Violate the Appropriations Clause of the Constitution .... 25 G. The Motions to Sell and Proposed Sale Order Violate SSA Laws ................... 27 II. The Motions to Compromise are Objectionable ........................................................... 30 CONCLUSION ............................................................................................................................. 31


ii

TABLE OF AUTHORITIES

Cases

Anderson v. Occidental Life Ins. Co., 727 F.2d 855 (9th Cir.1984) ......................................................................................... 25

Bodimetric Health Servs. v. Aetna,

903 F/2d 480 (7th Cir. 1990) .................................................................................. 10, 17 BP Care, Inc. v. Thompson,

398 F.3d 503 (6th Cir. 2005, cert. denied, 126 S. Ct. 622 (2005) .................................. 8 Brown v. General Motors Corp.,

152 B.R. 935 (W.D. Wis. 1993) ................................................................................... 14 Cannon v. Apfel,

213 F.3d 970 (7th Cir. 2000) ........................................................................................ 28 Chicago Title Insurance Company v. Seko Investment, Inc. (In re Seko Investment, Inc.),

156 F.3d 1005 (9th Cir. 1997) ...................................................................................... 15 Conoco, Inc. v. Styler (In re Peterson Distributing, Inc.),

82 F.3d 956 (10th Cir. 1996) ........................................................................................ 15 Deerbrook Pavillion, LLC v. Shalala,

235 F.3d 1100 (8th Cir. 2000), cert. denied, 535 U.S. 992 (2001) ........................ passim Downtown Medical Center/Comprehensive Health Care Clinic v. Bowen,

944 F.2d 756 (10th Cir. 1991) ...................................................................................... 26 Eagle Healthcare, Inc. v. Sebelius,

969 F. Supp. 2d 38 (D.D.C. 2013) ............................................................................ 8, 23 Excel Home Care, Inc. v. U.S. Dep't of Health & Human Servs.,

316 B.R. 565 (D. Mass. 2004) ...................................................................................... 10 Fla. Agency for Health Care Admin. v. Bayou Shores SNF, LLC (In re Bayou Shores SNF, LLC), 828 F.3d 1297 (11th Cir., 2016) .......................................... 10 Flick v. Liberty Mutual Fire Insurance Company,

205 F.3d 386 (9th Cir. 2000) ........................................................................................ 26 Folger Adam Security, Inc. v. Dematteis/MacGregor JV,

209 F.3d 252 (3rd Cir. 2000) ......................................................................................... 15


iii

Garland v. Sullivan, 737 F.2d 1283 (3d Cir. 1984).................................................................................. 25, 26

In re AHN Homecare, LLC,

222 B.R. 804 (Bankr. N.D. Tex. 1998) ......................................................................... 10 In re Airlift International, Inc.,

761 F.2d 1503 (11th Cir. 1985) .................................................................................... 21 In re Baker, 214 B.R. 489 (Bankr. S.D. Ohio 1997) ......................................................................... 28 In re Bayou Shores SNF, LCC, 828 F.3d 1297 (11th Cir. 2016), cert. denied, 85 U.S. L.W. 3589 (U.S. June 5, 2017) ....................................................................................................... 10

In re Charter Behavioral Health Sys., LLC, 45 Fed. Appx. 150, 2002 WL 2004651 n.1 (3d Cir. June 3, 2002) ........................ 12, 23

In re Fluellen,

Case No. 05–40336, 2006 WL 687160 (Bankr. S.D.N.Y. Mar. 13, 2006) ................... 10 In re Heffernan Memorial Hospital,

192 B.R. n.4 (Bankr. S.D. Calif. 1996) ......................................................................... 19 In re Hodges,

364 B.R. 304 (Bankr. N.D. Ill. 2007) ........................................................................... 10 In re Home Comp Care, Inc.,

221 B.R. 202 (N.D. Ill. 1998) ....................................................................................... 10 In re Hosp. Staffing Servs., Inc.,

258 B.R. 53 (S.D. Fla. 2000) ........................................................................................ 10 In re House of Mercy, Inc.,

353 B.R. 867 (Bankr. W.D. La. 2006) .......................................................................... 10 In re Ionosphere Clubs, Inc.,

85 F.3d 992 (2d Cir. 1996)............................................................................................ 21 In re Lawrence United Corp.,

221 B.R. 661 (Bankr. N.D. N.Y. 1998) ........................................................................ 15 In re Mid-Delta Health Sys., Inc.,

251 B.R. 811 (Bankr. N.D. Miss. 1999) ....................................................................... 10


iv

In re Mirant Corp., 440 F.3d 238 (5th Cir. 2006) ....................................................................................... 24

In re Monsour Medical Center,

11 B.R. 1014 (W.D. Penn. 1981) .................................................................................. 19 In re Nat’l Gypsum Co.,

208 F.3d 498 (5th Cir. 2000) ........................................................................................ 20 In re Orthotic Ctr., Inc.,

193 B.R. 832 (N.D. Ohio 1996) .................................................................................... 10 In re Ragos,

700 F.3d 220 (5th Cir. 2012) ........................................................................................ 28 In re Raintree Healthcare Corp.,

431 F.3d 685 (9th Cir. 2005) ........................................................................................ 20 In re S. Inst. for Treatment & Evaluation, Inc.,

217 B.R. 962 (Bankr. S.D. Fla. 1998)........................................................................... 10 In re Santiago,

563 B.R. 457 (Bankr. D.P.R. 2017) .............................................................................. 19 In re Shary,

152 B.R. 724 (Bankr. N.D. Ohio. 1993) ....................................................................... 14 In re Slater Health Center, Inc.,

294 B.R. 423 (Bankr. D.R.I. 2003) ............................................................................... 19 In re St. Johns Home Health Agency,

173 B.R. 238 (Bankr. S.D. Fla. 1994)............................................................ 9, 10,17, 19 In re St. Mary Hosp.,

123 B.R. 14 (E.D. Pa. 1991) ......................................................................................... 11 In re Taylor,

198 B.R. 142 (Bankr. D. S.C. 1996) ............................................................................. 17 In re Tidewater Mem’l Hosp.,

106 B.R. 876 (Bankr. E.D. Va. 1989) ........................................................................... 19 In re Tri Cty. Home Health Servs., Inc.,

230 B.R. 106 (Bankr. W.D. Tenn. 1999) ...................................................................... 10


v

In re Upsher Laboratories, 135 B.R. 1179 (Bankr. W.D. Mo. 1991 .......................................................................... 9

In re Vitalsigns Homecare, Inc.,

396 B.R. 232 (Bankr. D. Mass. 2008) .............................................................. 19, 20, 24 In re Welker,

163 B.R. 488 (Bankr. N.D. Tex. 1994) ................................................................... 13, 29 In re West Electronics, Inc.,

852 F.2d 79 (3d Cir. 1988)............................................................................................ 24 In re White Crane Trading Co.,

170 B.R. 694 (Bankr. E.D. Cal. 1994) .......................................................................... 13 Jandel v. Precision Colors, Inc.,

19 B.R. 415 (Bankr. S.D. Ohio 1982) ........................................................................... 14 Kosadnar v. Metro. Life Ins. Co. (Matter of Kosadnar),

157 F.3d 1011 (5th Cir. 1998) ...................................................................................... 14 Lee v. Schwieker,

739 F.2d 870 (3d. Cir. 1984)......................................................................................... 15 Matter of Superior Toy & Manufacturing Company, Inc.,

78 F.3d 1169 (7th Cir. 1996) ........................................................................................ 22 Matter of Visiting Nurse Ass’n, Inc.,

121 B.R. 114 (Bankr. M.D. Fla. 1990) ......................................................................... 19 Md. Dept. of Human Res. v. Dept. of Agriculture,

976 F.2d 1462 (4th Cir. 1992) .......................................................................... 11, 18, 26 Mission Hosp. Reg’l Med. Ctr. v. Burwell,

819 F.3d 1112 (9th Cir. 2016) ........................................................................................ 5 Office of Personnel Management v. Richmond,

496 U.S. 414 (1990) ..................................................................................................... 25, Reiter v. Cooper,

507 U.S. 258 (1993) ...................................................................................................... 14 Richmond Leasing Co. v. Capital Bank, N.A.,

762 F.2d 1303 (5th Cir. 1985) ...................................................................................... 22


vi

Triad at Jeffersonville I, LLC v. Leavitt, 563 F.Supp.2d 1 (D.D.C.2008) ..................................................................................... 12

U.S., Dep't of Health & Human Servs. v. James,

256 B.R. 479 (W.D. Ky. 2000) ..................................................................................... 10 United States v. Consumer Health Services of America, Inc.,

108 F.3d 390 (D.C. Cir. 1997) .................................................................... 11, 12, 14, 19 United States v. Vernon Home Health, Inc.,

21 F.3d 693 (5th Cir. 1994) ................................................................................... passim University Med. Ctr. v. Sullivan (In re University Med. Ctr.),

973 F.2d 1065 (3d Cir. 1992)........................................................................................ 19

Statutes

5 U.S.C. § 552 ................................................................................................................... 27 11 U.S.C. 363 ............................................................................................................. passim 11 U.S.C. § 365 .......................................................................................................... passim 11 U.S.C. § 541 ................................................................................................................. 29 28 U.S.C. § 41 ..................................................................................................................... 9 41 U.S.C. § 6305 ............................................................................................................... 24 42 U.S.C. § 401 ................................................................................................................... 6 42 U.S.C. § 405 .......................................................................................................... passim 42 U.S.C. §§ 407 ............................................................................................................... 28 42 U.S.C. § 1306 ............................................................................................................... 27 42 U.S.C. § 1383 ............................................................................................... 7, 27, 28, 29 42 U.S.C. § 1395 ........................................................................................................ passim Social Security Amendments of 1939, Pub. L. No. 379, 53 Stat. 1360 (1939) .................. 9

Deficit Reduction Act of 1984, Pub. L. No. 98-369. 98 Stat. 1162 (1084) ........................ 9


vii

Regulations 20 C.F.R. § 401.100 .......................................................................................................... 27

20 C.F.R. § 404.1820 ........................................................................................................ 28

20 C.F.R. § 404.2001 .......................................................................................................... 7 20 C.F.R. § 404.2035 .......................................................................................................... 7 20 C.F.R. §§ 404.2040 ........................................................................................................ 7 20 C.F.R. §§ 404.2045 ........................................................................................................ 7 20 C.F.R. §§ 404.2060 .................................................................................................. 7, 30 42 C.F.R. § 400.202 ............................................................................................................ 4 42 C.F.R. § 405.1803 .......................................................................................................... 6 42 C.F.R. § 405.1807 .......................................................................................................... 6 42 C.F.R. § 405.1885 .......................................................................................................... 6 42 C.F.R. § 412.521 ............................................................................................................ 6 42 C.F.R. Part 413............................................................................................................... 5 42 C.F.R. § 413.60 ........................................................................................................ 6, 10 42 C.F.R. § 424.535 ............................................................................................................ 5 42 C.F.R. § 424.550 ............................................................................................................ 5 42 C.F.R. Part 483........................................................................................................... 4, 6 42 C.F.R. § 488. ......................................................................................................... passim 42 C.F.R. § 489 .......................................................................................................... passim

Miscellaneous 2 Lawrence P. King, Collier on Bankruptcy ¶ 363.06[5] (15th ed. 1998) ......................... 16


1

The United States of America (the “United States”), on behalf of the U.S.

Department of Health and Human Services (“HHS”), the Centers for Medicare & Medicaid

Services (“CMS”), and the U.S. Social Security Administration (“SSA”)1 hereby objects

to the six Motions of Debtors for Entry of an Order (I) Approving Form of Operations

Transfer Agreement, (II) Assets of the Transfer Portfolio Free and Clear of All Liens,

Claims, Encumbrances, and Interests, and (III) Granting Related Relief (DK Nos. 580,

581, 582, 583, 584, and 585) (collectively, the “Motions to Sell”), and to the six Motions

of Debtors for Entry of an Order (I) Approving Settlement Agreement, and (II) Granting

Related Relief (DK Nos. 574, 575, 576, 577, 578, and 579) (collectively, the “Motions to

Compromise”). In support of its objection, the United States states as follows:

INTRODUCTORY NOTE

Although the proposed orders contain some language preserving the United States’

rights, certain modifications and further language is necessary. Undersigned counsel

discussed these issues with Debtors’ counsel and proposed additional language. At this

time, undersigned counsel has not received any response to the proposed language, and

thus the United States files this limited objection to preserve its rights until an acceptable

revised order is on file.

1 Upon information and belief, none of the facilities being transferred pursuant to DK Nos. 580 - 585 are HUD facilities; as such, HUD does not object, but reserves its rights to do so should it determine an objection is necessary.


2

FACTUAL AND PROCEDURAL BACKGROUND

1. On December 4, 2018 (the “Petition Date”), these 128 Debtors2 filed

voluntary petitions for relief under chapter 11 of Title 11 of the United States Code (the

“Bankruptcy Code”). Pursuant to sections 1107(a) and 1108 of the Bankruptcy Code,

Debtors continue to operate skilled nursing facilities or hospices (or serve as holding

companies or master tenant for operating Debtors).

2. On February 26, 2019, the Debtors moved to transfer operations of forty-

three skilled nursing facilities and/or hospices, including their Medicare provider

agreements, free and clear of all liens, claims and encumbrances, including successor

liability, and sought approval to settle certain issues with landlords of those facilities.

3. The Motions to Sell included as exhibits example operating transfer

agreements (“OTAs”) that were missing referenced schedules or cure notices.

4. Pursuant to section 2.2(b)(iii) of the OTAs, the new operators would

provide the Debtors with indemnity for Medicare liabilities after the Effective Time, but

the Debtors would provide none for the new operators.

5. Moreover, section 2.4 of the OTAs makes it abundantly clear that the new

operators are not assuming successor liability for Medicare liabilities from the time prior

to their operation.

6. Along with the Motions to Sell is a proposed form of sale order (“Proposed

Sale Order”). The Proposed Sale Order contains a broad injunction and other protections

from successor liability, including a convoluted paragraph 11 allegedly authorizing the new

2 A complete list of the Debtors in these cases is found in Exhibit A to the Debtors’ Motions to Sell, including eight Debtors who filed bankruptcy after December 4, 2018.


3

operators to decide what liabilities they assume, despite the fact that such terms would

violate Medicare laws (as well as the Bankruptcy Code) and fatally interfere with the

Medicare Change of Ownership (“CHOW”) process.

7. Also, the OTAs, pursuant to section 2.3, purport to transfer “Resident Trust

Funds” to the new operators. It is not clear if the Debtors’ representative payee status is

also sought to be transferred. The required SSA procedures do not permit transfer of

Resident Trust Funds and representative payee status without meeting SSA statutory and

regulatory compliance.

8. In sum, sections 2.2(b), 2.3, and 2.4, taken together with the Proposed Sale

Order indicate that the Debtors and new operators do not intend to follow applicable laws

in the pursuit of these transfers.

9. The Proposed Sale Order also fails to fully protect the police and regulatory

powers of the United States and appears to authorize the sale without prior approval of the

United States, as required by law to ensure the health and safety of the patients.

10. As of March 6, 2019, the forty-three Debtors proposing to transfer their

operations are in default of their obligations under their Medicare provider agreements for

outstanding overpayments of at least $26,500.00 and civil money penalties of at least

$672,000.00.3

REGULATORY BACKGROUND

I. Medicare Program

3 CMS reserves all rights to amend or supplement these amounts should it learn of further defaults or adjustments.


4

11. These forty-three Debtors provide long-term acute care services under the

Medicare program. To be eligible to do so, a provider must have a valid agreement with

the Secretary of HHS (“Secretary”), called a Health Insurance Benefit Agreement

(commonly known as a “provider agreement”). 42 U.S.C. § 1395cc; 42 C.F.R. § 400.202

(defining “provider”). A provider agreement is defined as an agreement between CMS,

acting on behalf of the Secretary, and a health facility, such as a skilled nursing facility or

hospice (such as those operated by Debtors), for the provision of Medicare services in

compliance with Medicare law. 42 C.F.R. § 489.3; 42 C.F.R. § 489.2.

12. To obtain a provider agreement, a new provider must apply for an initial

certification. See 42 C.F.R. §§ 488.1, 488.3, 489.1, 489.2 and 489.10. The certification

process enables HHS to determine that the provider is qualified to provide health care

services to patients. See 42 C.F.R. §§ 489.10-.12 (grounds for denying a provider

agreement); see also 42 C.F.R. Part 483, subpart B (requirements for long term care

facilities).

13. Transfer of a provider agreement is strictly limited. Provider agreements

may be assigned only if there is a “change of ownership” (known as a “CHOW”). 42

C.F.R. § 489.18. When CMS determines that there has been a valid “change of ownership,”

the existing provider agreement is automatically assigned to the new owner. 42 C.F.R. §

489.18(c); United States v. Vernon Home Health, Inc., 21 F.3d 693, 696 (5th Cir. 1994);

Deerbrook Pavillion, LLC v. Shalala, 235 F.3d 1100, 1103-04 (8th Cir. 2000), cert. denied,

535 U.S. 992 (2001).

14. An assigned provider agreement is subject to all statutory and regulatory

terms under which it originally was issued, including the adjustment of payments to


5

account for previously made overpayments and unpaid civil money penalties. Vernon, 21

F.3d at 696 (citing 42 C.F.R. § 489.18(a), (d)); Mission Hosp. Reg’l Med. Ctr. v. Burwell,

819 F.3d 1112, 116 (9th Cir. 2016) (holding that § 489.18(d) “provides continuity of

obligations, continuity which is essential to the functioning of Medicare’s Prospective

Payment System. The regulation talks about an assignment, not a new beginning with a

clean slate on new terms.”); 42 C.F.R. § 489.18(d) (“[a]n assigned agreement is subject to

all applicable statutes and regulations and to the terms and conditions under which it was

originally issued”); Deerbrook, 235 F.3d at 1104.

15. Medicare regulations specifically prohibit the sale or transfer of billing

privileges or a Medicare billing number, except pursuant to a valid change of ownership.

42 C.F.R. § 424.550; see also 42 C.F.R. § 424.535(a)(7) (revocation of Medicare

enrollment for knowingly selling Medicare billing number unless exception applies).

16. With respect to amounts paid to providers, the Medicare Statute provides

for prospective payments with adjustments after the fact:

[t]he Secretary shall periodically determine the amount which should be paid under this part to each provider of services with respect to the services furnished by it, and the provider of services shall be paid, at such time or times as the Secretary believes appropriate (but not less often than monthly) and prior to audit or settlement . . . the amounts so determined, with necessary adjustments on account of previously made overpayments or underpayments.

42 U.S.C. § 1395g(a) (emphasis added).

17. The Secretary, through Medicare Administrative Contractors (“MACs”),

makes payment for services provided to Medicare beneficiaries by skilled nursing facilities

under a prospective payment system. 42 C.F.R. Part 413, subparts A and J. A provider

must submit annual cost reports to the MAC. See 42 U.S.C. § 1395hh. The MAC audits


6

each cost report and determines the provider's actual, rather than estimated, reimbursement

amount for the year. 42 U.S.C. §§ 1395g; 1395x(v)(1)(A); 42 C.F.R. §§ 412.521. The

MAC then issues a "Notice of Amount of Medicare Program Reimbursement” (“NPR”),

which determines whether the provider was overpaid or underpaid for that fiscal year. 42

C.F.R. §§ 413.60, 405.1803. The NPR determination is final unless revised by the

intermediary or revised or overturned on appeal. See § 42 U.S.C. §§ 1395oo (a) and (f)(1)

(judicial review); 42 C.F.R. § 405.1807 and § 405.1835; see also 42 C.F.R. § 405.1885

(permits reopening of final cost report determinations).

18. To participate in the Medicare program, a skilled nursing facility must be in

“substantial compliance” with federal participation requirements at all times. 42 U.S.C. §§

1395i-3(a)(3), (b)-(d); 42 C.F.R. Part 483, subpart B. CMS or the state health agency,

under agreement with the Secretary, periodically conducts onsite surveys of skilled nursing

facilities to verify compliance with Medicare participation requirements. See A42 U.S.C.

§§ 1395i-3 (g)(1)(A), 1395aa(a); 42 C.F.R. §§ 488.10(a), 488.11, 488.20. CMS may, and

in some cases must, impose civil money penalties and other enforcement “remedies” on a

skilled nursing facility if a survey finds substantial noncompliance with federal

participation requirements. 42 U.S.C. § 1395i-3(h)(2)(A); 42 C.F.R. §§ 488.402(b),

488.406-488.414; 42 C.F.R. § 488.430 (civil money penalties).

II. Social Security Programs

19. SSA provides Social Security benefits to individuals who apply for benefits

and are eligible.4 See 42 U.S.C. §§ 401, et seq.

4 SSA is an independent federal agency and is not part of the Department of Health and Human Services (HHS). See https://www.ssa.gov/history/index.html. The Centers for Medicare & Medicaid Services, which is a part of HHS, oversees and administers the


7

20. SSA usually pays benefits directly to the beneficiaries; however, the Social

Security Act provides that for those beneficiaries who are unable to direct the management

of their own affairs, including their finances, SSA may make payment of their benefits to

a “representative payee.” See 42 U.S.C. §§ 405(j)(1)(A); 1383(a)(2)(A)(ii)(I); see also 20

C.F.R. § 404.2001, 404.2010, 416.601, 416.610. A skilled nursing facility or hospice, such

as the ones the Debtors operate, may be qualified as representative payees.

21. The Social Security benefits received by a representative payee are the

beneficiaries’ funds -- not the funds/assets of the payee -- and the representative payee must

use the funds for the “use and benefit” of the beneficiary. See 42 U.S.C. §§ 405(j)(1)(A),

1383(a)(2)(A); see also 20 C.F.R. §§ 404.2035-404.2040, 416.635-416.640 (explaining the

representative payee’s responsibilities to use the Social Security benefits received on behalf

of a beneficiary for the beneficiary’s use and benefit).

22. The representative payee must follow a regulatory payment priority scheme

in using the benefits. See 20 C.F.R. §§ 404.2040, 416.640 (providing how a representative

payee must use the funds they receive on behalf of an individual).

If any benefits remain after they are used accordance to the regulatory scheme, they must

be “conserved or invested on behalf of the beneficiary,” and any benefit funds “are the

property of the beneficiary and may not be considered to be the property of the payee.”

See 20 C.F.R. §§ 404.2045(a), 416.645(a). If a representative payee retains SSA funds on

behalf of a beneficiary, the representative payee may transfer the accumulated funds to a

successor payee, the beneficiary, or to SSA. See 20 C.F.R. §§ 404.2060, 416.660.

Medicare and Medicaid programs. See https://www.cms.gov/About-CMS/About-CMS.html.


8

Representative payees are responsible for providing an accounting to SSA as to how they

have used beneficiaries’ Social Security benefits. See 20 C.F.R. §§ 404.2035, 404.2065,

416.635, 416.665.

ARGUMENT

23. The Motions to Sell are objectionable for seven primary reasons: first, they

violate jurisdictional limitations imposed by Congress; second, they violate Medicare laws;

third, they contravene Section 363(f); fourth, they contravene Section 365; fifth, they

violate the Anti-Assignment Act; sixth, they violate the Constitution’s Appropriations

Clause; and, seventh, they fail to preserve SSA’s rights. The Motions to Compromise are

objectionable because these settlements are intertwined with the contemplated sales, and

are objectionable for the same reasons as the Motions to Sell. These arguments are

addressed in turn, below.

I. The Motions To Sell Are Objectionable

A. The Bankruptcy Court Lacks Subject Matter Jurisdiction Over Any Dispute Arising Under the Medicare Act (42 U.S.C. § 1395g)

24. The Motions to Sell unavoidably present issues arising under the Medicare

Act, because issues concerning what CMS should pay, whether CMS may make

adjustments in payment under the Medicare Act, and whether and how a provider

agreement may be transferred are governed by Medicare law. 42 U.S.C. 1395cc; 42 C.F.R.

Part 489; Vernon, 21 F.3d at 696 (sale of provider agreement arose in federal law which

stated that Medicare liability and recoupment follow the provider agreement); accord,

Deerbrook, 235 F.3d at 1104; BP Care, Inc. v. Thompson, 398 F.3d 503, 509-11 (6th Cir.

2005) (provider’s declaratory judgment and lack of due process claims with respect to

successor liability arose in Medicare law) cert. denied, 126 S.Ct. 622 (2005); Eagle


9

Healthcare, Inc. v. Sebelius, 969 F. Supp. 2d 38, 44 (D.D.C. 2013) (provider’s claim that

CMS incorrectly recouped overpayments post-settlement arose in Medicare law).5

25. Congress expressly removed bankruptcy jurisdiction over Medicare issues

in 42 U.S.C. § 405(h). Section 405(h) originally provided that: "No action against the

United States, the Board, or any officer or employee thereof shall be brought under section

24 of the Judicial Code of the United States to recover on any claim arising under this title."

Social Security Amendments of 1939, Pub. L. No. 379, § 205(h), 53 Stat. 1360, 1371

(1939). Section 24 (then codified at 28 U.S.C. § 41) in turn contained "virtually all of the

jurisdictional grants to the district courts including bankruptcy jurisdiction." In re St. Johns

Home Health Agency, 173 B.R. 238, 244 (Bankr. S.D. Fla. 1994). As originally enacted,

Congress, in § 405(h), expressly barred bankruptcy jurisdiction over Medicare issues. Id.;

In re Upsher Laboratories, 135 B.R. 117, 119 (Bankr. W.D. Mo. 1991).

26. 42 U.S.C. § 405(h) was subsequently recodified by the Deficit Reduction

Act of 1984, Pub. L. No. 98-369, 98 Stat. 1162, § 2663(a)(4)(D), and now provides:

No findings of fact or decision of the . . . [Secretary of HHS] shall be reviewed by any person, tribunal, or governmental agency except as herein provided. No action against the United States, the . . . [Secretary of HHS], or any officer or employee thereof shall be brought under section 1331 or 1346 of Title 28 to recover on any claim arising under this subchapter.

Id. Congress simultaneously made clear through a statutory statement, however, that the

revision to Section 405(h) referring to 1331 and 1346 was not meant to alter the scope of

Section 405(h)’s jurisdictional preclusion which formerly barred bankruptcy jurisdiction.

5 When a provider agreement is assigned, any underpayments that CMS may subsequently determine are also paid to the assignee.


10

27. The most recent and thorough discussion is set forth in Fla. Agency for

Health Care Admin. v. Bayou Shores SNF, LLC (In re Bayou Shores SNF, LLC), 828 F.3d

1297, 1314-16 (11th Cir., 2016)(“we align ourselves with the Seventh, Eighth, and Third

Circuits and hold that § 405(h) bars § 1334 jurisdiction over claims that “arise under [the

Medicare Act]”). The court explained that Congress revised the original wording of section

405(h) to take into account subsequent recodifications that had divided section 24 of the

Judicial Code into separate sections of Title 28 of the U.S. Code. However, when Congress

did so, it stated that its revision was merely a “Technical Correction” and was not meant to

change the law which existed prior to that date. Id. at 1314. Moreover, this statement of

Congressional intent is not contained in a legislative report, but is reflected in statutory

language appearing in the statutes at large that controls over the literal wording of 42 U.S.C.

§ 405(h). Bayou Shores at 1314-15; see also Bodimetric Health Servs. v. Aetna, 903 F/2d

480, 489 (7th Cir. 1990).

28. Numerous courts in the Fifth Circuit have similarly held that section 405(h)

bars bankruptcy jurisdiction. In re AHN Homecare, LLC, 222 B.R. 804, 807-10 (Bankr.

N.D. Tex. 1998); In re House of Mercy, Inc., 353 B.R. 867, 869-73 (Bankr. W.D. La. 2006);

In re Mid-Delta Health Sys., Inc., 251 B.R. 811, 814-15 (Bankr. N.D. Miss. 1999).6

6 In fact, the overwhelming weight of case law squarely supports the conclusion that section 405(h) bars bankruptcy jurisdiction. Excel Home Care, Inc. v. U.S. Dep't of Health & Human Servs., 316 B.R. 565, 572–574 (D. Mass. 2004); In re Hodges, 364 B.R. 304, 305–06 (Bankr. N.D. Ill. 2007); In re Fluellen, Case No. 05–40336, 2006 WL 687160, at *1 (Bankr. S.D.N.Y. Mar. 13, 2006); U.S., Dep't of Health & Human Servs. v. James, 256 B.R. 479, 481–82 (W.D. Ky. 2000); In re Hosp. Staffing Servs., Inc., 258 B.R. 53, 57–58 (S.D. Fla. 2000); In re Tri Cty. Home Health Servs., Inc., 230 B.R. 106, 108 n. 1 (Bankr. W.D. Tenn. 1999); In re S. Inst. for Treatment & Evaluation, Inc., 217 B.R. 962, 965 (Bankr. S.D. Fla. 1998); In re Home Comp Care, Inc., 221 B.R. 202, 206 (N.D. Ill. 1998); In re Orthotic Ctr., Inc., 193 B.R. 832, 835 (N.D. Ohio 1996); In re St. Johns Home Health Agency, Inc., 173 B.R. 238, 245–46 (Bankr. S.D. Fla. 1994); In re


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29. Thus, the Bankruptcy Court lacks subject matter jurisdiction to address

issues arising under the Medicare Act, including whether Medicare provider agreements

may be transferred and whether and how Medicare payments may be adjusted.

B. The Contemplated Sales Violate Medicare Laws

30. Debtors seek to transfer their Medicare provider agreements “free and

clear” of any claims, including successor liability, in violation of the CHOW process and

Medicare law.

31. Arguably, the contemplated sales are structured to be “free and clear” of

CMS’s statutory right to adjust payments in light of past overpayments. The requested

relief could be interpreted to bar CMS from effectuating Congress’ requirement that

“necessary adjustments” be made to the amount of Medicare payments made to a provider.

In essence, the Debtors ask the Court to expunge a critical element of the payment provision

of the Medicare statute. There is no “authority for the proposition that the Bankruptcy

Code can act to override an explicit statutory limitation on what the government owes for

a particular service.” United States v. Consumer Health Services of America, Inc., 108

F.3d 390, 394 (D.C. Cir. 1997); see also Md. Dept. of Human Res. v. Dept. of Agriculture,

976 F.2d 1462, 1480-81 (4th Cir. 1992) (recoupment rights “forecloses any equitable

attempt, whether by injunction or otherwise” to bar the recovery of overpayments). The

Debtors’ request that the court extinguish CMS’s statutory powers clearly violates these

principles and therefore must be denied.

Upsher Labs., Inc., 135 B.R. 117, 117–20 (Bankr. W.D. Mo. 1991); In re St. Mary Hosp., 123 B.R. 14, 16–18 (E.D. Pa. 1991).





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32. Furthermore, the filing of a petition in bankruptcy does not alter these

principles. Bankruptcy courts have recognized that section 1395g(a) is Congress’ basic

blueprint for Medicare reimbursement. “There is no evading it or circumventing it, under

any authority or at any time.” In re Tri County Home Health Services, Inc., 230 B.R. 106,

112 (Bankr. W. D. Tenn. 1999). A bankruptcy court “may not interfere with . . . the

statutory prescription that [the Secretary] make ‘necessary adjustments’ to current payment

to account for previously rendered overpayments.” In re Southern Institute for Treatment

and Evaluation, Inc., 217 B.R. 962, 966 (Bankr. S. D. Fla. 1998). Indeed, section 1395g(a)

defines the Medicare program’s substantive liability under a provider agreement.

Consumer Health Services of America, 108 F.3d at 393-394.7

33. Therefore, any order transferring the Debtors’ Medicare provider

agreements “free and clear” of the statutory and regulatory directives of Medicare laws is

impermissible. A debtor does not have carte blanche to create or impose any conditions it

desires in a sale. Indeed, “[t]he purpose of bankruptcy is not to permit debtors or non-

debtors to wrest competitive advantage by exempting themselves from the myriad of laws

7 Similarly, bankruptcy should not alter Medicare’s regulatory requirement of successor liability for an assignee of a provider agreement. See In re Charter Behavioral Health Sys., LLC, 45 Fed. Appx. 150, 151, 2002 WL 2004651, *1 n.1 (3d Cir. June 3, 2002) (observing that “[i]f the new owner elects to take an assignment of the existing Medicare Provider Agreement, it receives an uninterrupted stream of Medicare payments but assumes successor liability for overpayments and civil monetary penalties asserted by the Government against the previous owner”) (emphasis added) (citing 42 C.F.R. § 489.18(d); Deerbrook Pavilion, LLC, 235 F.3d at 1103-05; Vernon, 21 F.3d at 696); Triad at Jeffersonville I, LLC v. Leavitt, 563 F.Supp.2d 1, 18 (D.D.C.2008)(“A sales agreement stipulating that the new owner is not liable for the overpayments made to the previous owner is not evidence enough for recovery from the new owner to not occur ... If the new owner assumes assignment of the Medicare agreement, Medicare will attempt to recover from the new/current owner regardless of the sales agreement”).


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that regulate business.” In re White Crane Trading Co., 170 B.R. 694, 702 (Bankr. E.D.

Cal. 1994) (bankruptcy court could not authorize sale that would be inconsistent with

consumer protection laws). See also In re Welker, 163 B.R. 488 (Bankr. N.D. Tex. 1994)

(trustee could not sell real property without complying with procedures of U.S. Dept. of

Housing and Urban Development).8 On this ground alone, the Motions to Sell must be

denied.

34. Simply put, the Debtors cannot violate federal laws in an attempted section

363 sale. Any new operator must be subject to the law, as the Debtors currently are.

C. The Contemplated Sales Contravene Section 363 of the Bankruptcy Code

35. The Debtors’ Motions to Sell are brought under section 363(f) of the

Bankruptcy Code. Section 363(f) authorizes certain sales of property “free and clear of

any interest in such property.” A sale may be authorized under Section 363(f) “only if”

one of five stated criteria is satisfied, but the Debtors satisfy none of these criteria with

respect to their Medicare provider agreements. Accordingly, the bankruptcy court cannot

approve sale of the Medicare provider agreements pursuant to Section 363(f).

36. Section 363(f) provides:

(f) The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if—

8 For these same reasons, any transfer obviously may not relieve the purchaser from complying with general Medicare requirements under a provider agreement, such as the requirement that the transferee meet the conditions for participation as a provider of services, including satisfaction of health and safety standards, and civil rights requirements imposed on recipients of federal funds. See 42 C.F.R. 489.10 (basic requirements for CMS approval of a provider agreement). While Debtors have not disputed such general regulatory requirements, any order authorizing transfer should make the continuation of such general regulatory obligations explicit.


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(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest; (2) such entity consents; (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in bona fide dispute; or (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

11 U.S.C. 363(f).

37. As a critical threshold consideration, the statutory provision (“necessary

adjustments,” 42 U.S.C. § 1395g(a)) which authorizes recoupment under a Medicare

provider agreement cannot truly be characterized as an “interest in property.” The term

“interest in property” generally refers to liens and security interests which have attached to

the property. See, e.g., In re Shary, 152 B.R. 724, 725 (Bankr. N.D. Ohio. 1993); Jandel

v. Precision Colors, Inc. 19 B.R. 415, 419-420 (Bankr. S.D. Ohio 1982). Recoupment does

not constitute a lien or a security interest. It is not a charge on property. To the contrary,

the “necessary adjustments” language at 42 U.S.C. § 1395g(a) defines the proper payment

due the provider. Consumer Health Services, 108 F.3d at 394. Put another way, it defines

the Debtors’ claims against CMS. Thus, it cannot be an interest which attaches to the

independently existing property; it is part of the fundamental process by which the payment

owed is actually determined.

38. Recoupment, “the setting off against asserted liabilities of a counterclaim

arising out of the same transaction,” is also the principle which allows a creditor to adjust

the amounts it owes a debtor. See Reiter v. Cooper, 507 U.S. 258, 264, 265 n.2 (1993). It

carries with it no right to payment and hence, it is not a claim under the Bankruptcy Code.

See Brown v. General Motors Corp., 152 B.R. 935, 938 (W.D. Wis. 1993). Recoupment

is not a claim, it is a defense to payment. See Kosadnar v. Metro. Life Ins. Co. (Matter of






15

Kosadnar), 157 F.3d 1011, 1013-14 (5th Cir. 1998); Chicago Title Insurance Company v.

Seko Investment, Inc. (In re Seko Investment, Inc.), 156 F.3d 1005, 1008-9 (9th Cir. 1997);

Conoco, Inc. v. Styler (In re Peterson Distributing, Inc.), 82 F.3d 956, 959 (10th Cir. 1996);

Lee v. Schwieker, 739 F.2d 870, 875 (3d. Cir. 1984). Because recoupment is not a claim, it

“does not even fall under the broadest interpretation of an “interest in property.” In re

Lawrence United Corp., 221 B.R. 661, 669 (Bankr. N.D. N.Y. 1998). Indeed, the Third

Circuit unequivocally held that recoupment does not “constitute an ‘interest’ for purposes

of section 363(f)” and, therefore, may not be extinguished by a bankruptcy sale. Folger

Adam Security, Inc. v. DeMatteis/MacGregor JV, 209 F.3d 252, 254-64 (3d Cir. 2000).

39. The two reported cases dealing with recoupment in a section 363(f) context,

Folger Adam Security, Inc. and Lawrence United Corp., expressly and unequivocally hold

that a “free and clear” sale under section 363(f) cannot extinguish recoupment rights.

40. As for the enumerated requirements of section 363(f), the Debtors cannot

establish the proper applicability of any of its five subparts. Under 11 U.S.C. § 363(f)(1),

a sale of a debtor’s property may be authorized free and clear of any interest in such

property if applicable nonbankruptcy law permits the sale of such property free and clear

of such interest. In law and in practice, a Medicare provider agreement may be assigned

to a purchaser only on specified terms, as part of the CHOW process. 42 C.F.R. § 489.18(d)

states that “[a]n assigned agreement is subject to all applicable statutes and regulations and

to the terms and conditions under which it was originally issued.” The leading case on this

point is U.S. v. Vernon Home Health, Inc., 21 F.3d 693, 696 (5th Cir. 1994), cert. denied

513 U.S. 1015 (1994). In Vernon, the Fifth Circuit held that:

[A]ny purchase of assets that involves the assignment of the [Medicare] provider agreement is subject to the relevant statutory and regulatory


16

conditions. One of these conditions is that adjustments are made for overpayments, pursuant to 42 U.S.C. § 1395g(a) . . .

21 F.3d at 696. Hence, the court held that the purchaser was liable for the previous

overpayments made under the provider agreement prior to the assignment and subject to

recoupment. Id. Similarly, an assignee of a Medicare provider agreement is subject to

civil money penalties, as determined by Deerbrook Pavilion, LLC v. Shalala, 235 F.3d

1100, 1103-04 (8th Cir. 2000), relying on and expanding Vernon. Under Medicare law,

the assignee of a Medicare provider agreement must accept that provider agreement as is.

Hence, the Debtors’ requested relief, which could be interpreted to eviscerate the burdens

of the Debtors’ Medicare provider agreements, cannot satisfy 11 U.S.C. § 363(f)(1).

41. Under 11 U.S.C. § 363(f)(2), a sale of a debtor's property may be authorized

free and clear of an interest if the party holding such interest consents. Here, CMS does

not consent to any sale which violates the Medicare statute and eviscerates the Medicare

provider agreement of its governing terms.

42. Under 11 U.S.C. § 363(f)(3), a sale of a debtor’s property may be authorized

free and clear of an interest if such interest is a lien. As already noted supra, the Secretary’s

statutory mandate to make “necessary adjustments” to payment is not an “interest” in

property, nor a lien on property.

43. Under 11 U.S.C. § 363(f)(4), a sale of a debtor’s property may be authorized

free and clear of an interest if the interest is in bona fide dispute. A debtor has the burden

of showing that a bona fide dispute exists. 2 Lawrence P. King, Collier on Bankruptcy ¶

363.06[5] (15th ed. 1998). This requires a debtor to show that “there is an objective basis

for either a factual or legal dispute as to the validity of the debt.” Id. Here, the Debtors


17

point to no objective basis for disputing the validity of any liabilities under the provider

agreements.

44. For instance, in In re Taylor, 198 B.R. 142 (Bankr. D. S.C. 1996), the court

denied the debtor's motion to sell its nursing homes free and clear of leasehold interests.

The debtor argued that the leases were subject to a bona fide dispute because the lessees

were in default on their rent and taxes. Id. at 163. The court held that the debtor could not

sell free of the leasehold unless it proved that the default retroactively terminated the lease

entirely. Id. Short of that, the lessees’ alleged default did not raise a bona fide dispute as

to the existence of the “interest” in the lease. Id.

45. Similarly, in the present case, the Debtors may or may not dispute the dollar

amount of any specific civil money penalty or any overpayment which the Secretary may

seek to recoup, but these amounts are not the so-called “interest” at stake. What the Debtors

are actually seeking to avoid altogether is CMS’s statutory directive and authority to make

“necessary adjustments” when it calculates a provider’s proper payment: that statutory

term is the relevant focus for a § 363(f)(4) analysis.

46. Even assuming arguendo that the “necessary adjustments” term of 42

U.S.C. § 1395g(a) constituted an “interest in property,” there could be no bona fide dispute

about the existence of the “necessary adjustments” directive as a component of the

Medicare statute. The same is true with respect to the CHOW and assignment process.

That is clear from the text of the Medicare statute.9

9 As noted above, bankruptcy courts may not exercise jurisdiction over issues arising under Medicare. There is no basis outside the Medicare statute by which any court may take jurisdiction over a Medicare dispute. 42 U.S.C. § 1395ii (incorporating 42 U.S.C. § 405(h)); Bodimetric Health Services, Inc., 903 F.2d at 488-489; St. Johns Home Health Agency, Inc., 173 B.R. at 244. Thus, even if a debtor’s disputes about any of its particular


18

47. Finally, under 11 U.S.C. § 363(f)(5), a sale of a debtor’s property may be

authorized free and clear of any interest in such property if the holder of that interest could

be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such

interest. No legal or equitable proceeding could compel the Secretary to accept money to

disregard or abrogate the statute by which Congress has directed his actions in running the

Medicare program. See Md. Dept. of Human Res., 976 F.2d at 1480 (“An injunction may

not strip a federal agency of its power to exercise lawful authority conferred by Congress

through statute.”).

48. In summary, the Secretary’s statutory rights and authority under the

Medicare statute and regulations, including their directive to make “necessary

adjustments” to a provider’s current payment when it is determined by the Secretary that

an overpayment was previously made, do not fall within the “interest in property”

consideration of 11 U.S.C. § 363(f). Furthermore, none of the five sub-criteria of § 363(f)

can be met. Accordingly, Debtors fail to satisfy any portion of 11 U.S.C. § 363(f), and the

Court should deny their motions for approval of a “free and clear” transfer of their

Medicare provider agreements.

D. The Motions to Sell Contravene Section 365 of the Bankruptcy Code

49. Recognized as an executory contract in the bankruptcy context, a Medicare

provider agreement can only lawfully be transferred in keeping with the terms of 11 U.S.C.

Medicare overpayments did constitute the “interest” for a § 363(f)(4) analysis, a court could not make any assessment about the alleged dispute at all, even as to whether it was “bona fide” or not, since doing so would be an unlawful judicial inquiry into a Medicare payment matter. For this same reason, a bankruptcy court lacks jurisdiction to render a decision on the “free and clear” issue since it inherently involves issues relating to Medicare reimbursement, and Medicare conditions for payment and transfer. See Id.


19

§ 365. The Debtors’ request for transfer of the provider agreements contravenes section

365 because it ignores all the fundamental requirements of curing the defaults, providing

adequate assurance of future performance, assumption, and assignment.

1. Medicare Provider Agreement as Executory Contract

50. While the Bankruptcy Code itself contains no express definition of an

executory contract, virtually every reported case which has commented on the matter has

recognized the Medicare provider agreement as an executory contract in the context of a

bankruptcy proceeding. See, e.g., University Med. Ctr. v. Sullivan (In re University Med.

Ctr.), 973 F.2d 1065, 1075-79 (3d Cir. 1992); Consumer Health Services of America, 108

F.3d at 393; In re Monsour Medical Center, 11 B.R. 1014, 1018 (W.D. Penn. 1981)

(dismissing debtor’s suggestion that provider agreement is something other than executory

contract as mere “interesting reading” which bears no correspondence to the reality of the

relationship between a debtor-provider and the Secretary); In re Santiago, 563 B.R. 457

(Bankr. D.P.R. 2017); In re Vitalsigns Homecare, Inc., 396 B.R. 232 (Bankr. D. Mass.

2008) (treating Medicare provider numbers as executory contracts); In re Slater Health

Center, Inc., 294 B.R. 423, 432 (Bankr. D.R.I. 2003); In re Heffernan Memorial Hospital,

192 B.R. at 231 n.4 (Bankr. S.D. Calif. 1996); In re St. Johns Home Health Agency, Inc.,

173 B.R. 238, 242 n.1 (Bankr. S.D. Fla. 1994); Matter of Visiting Nurse Ass’n, Inc., 121

B.R. 114, 119 (Bankr. M.D. Fla. 1990); In re Tidewater Mem’l Hosp., 106 B.R. 876, 883

(Bankr. E.D. Va. 1989) (and cases cited therein).

51. Further, in Vitalsigns Homecare, the bankruptcy court for the District of

Massachusetts treated Medicare provider numbers as executory contracts based on a

rationale that applying section 365 to the provider numbers is an appropriate harmonization


20

of the statutory schemes of the Bankruptcy Code and the Medicare Act. Vitalsigns

Homecare, 396 B.R. at 240-41. The court reasoned that “the provider number and the

provider agreement are part and parcel of a complicated statutory scheme. It appears that

the provider agreement, the statute, and the regulations form an arrangement that imposes

both benefits and burdens on the provider. It cannot accept the benefits without the

attendant burdens.” Vitalsigns Homecare, 396 B.R. at 240; see also In re Raintree

Healthcare Corp., 431 F.3d 685 (9th Cir. 2005) (Debtor cannot assign to the purchaser

greater rights than it had in the Medicare provider agreement); In re Nat’l Gypsum Co.,

208 F.3d 498, 506 (5th Cir. 2000) (“Where the debtor assumes an executory contract, it

must assume the entire contract, cum onere—the debtor accepts both the obligations and

the benefits of the executory contract”).

2. Attempting to Sell an Executory Contract Pursuant to Section 363(f)

52. Under the Bankruptcy Code, a trustee (or debtor-in-possession) must

assume or reject any executory contract to which the debtor was a party. The trustee (or

debtor-in possession) may ultimately wish to assign an executory contract to a third party,

as in a sale of assets. The Bankruptcy Code permits the assignment of an executory

contract only if certain criteria are satisfied:

The trustee may assign an executory contract . . . of the debtor only if -- (A) the trustee assumes such contract . . . in accordance with the provisions of this section; and (B) adequate assurance of future performance by the assignee of such contract . . . . is provided, whether or not there has been a default in such contract

11 U.S.C. § 365(f)(2).


21

53. The first step, the proper assumption of the executory contract, 11 U.S.C. §

365(f)(2)(A), requires that the trustee (or debtor-in-possession) “cures, or provides

adequate assurance that the trustee will promptly cure, such default[.]” 11 U.S.C. §

365(b)(1)(A).10 The intent of the law is to ensure that a non-debtor contracting party be

made whole before it can be forced to continue performing with a debtor. In re Ionosphere

Clubs, Inc., 85 F.3d 992, 999 (2d Cir. 1996). Debtors ignore this key requirement under §

365, apparently denying that CMS is currently owed any amounts under the provider

agreements and thus failing to serve the United States with a cure notice. To the contrary

the Debtors currently owe CMS at least $26,500 in overpayments and at least $672,000 in

civil money penalties across the forty-three facilities to be transferred, and this liability

could increase based on a yet to be filed cost report for 2018 and finalization of other

reviews, re-openings, audits and cost reports.11 Before the provider agreements may be

assumed, much less assigned, Debtors must make CMS whole and promptly pay the

amounts owed under the provider agreements. As the Seventh Circuit stated:

The language of § 365(b)(1) is unequivocal. A party to an executory contract must be paid all amounts due him under the contract before the contract may be assumed....We believe Congress passed § 365 to insure that a contracting party is made whole before a court can force the party to continue performing with a bankrupt debtor.

Matter of Superior Toy & Manufacturing Company, Inc., 78 F.3d 1169, 1174 (7th Cir.

1996).

10 Otherwise stated, assumption of an executory contract entails "liab[ility] for the performance of the entire contract." In re Airlift International, Inc., 761 F.2d 1503, 1508 (11th Cir. 1985).

11 This court may not adjudicate a reimbursement dispute due to the jurisdictional bar of 42 U.S.C. § 405 and accordingly must accept CMS’s determinations.


22

54. Just as a debtor seeking to assume must cure any default under the contract,

it must also provide adequate assurance of future performance. 11 U.S.C. § 365(b)(1).

Similarly, assignment of the assumed contract, 11 U.S.C. § 365(f)(2)(B), requires a

showing of adequate assurance that the assignee will perform under the contract in the

future. The statutory terms "adequate assurance of future performance" are not defined in

the Bankruptcy Code, but legislative history indicates that "they were intended to be given

a practical, pragmatic consideration." Richmond Leasing Co. v. Capital Bank, N.A., 762

F.2d 1303, 1309 (5th Cir. 1985). Adequate assurance implies, then, that a party to the

contract must have a genuine basis for confidence that the obligations due to it appear likely

to be performed by the assignee of the contract.

55. Thus, both subsections of section 365(f)(2), on the assignment of contracts

in bankruptcy, serve to protect the interest of the non-debtor party to an executory contract.

If an executory contract is to be assumed by a trustee (or debtor-in-possession), the non-

debtor party to the contract must have a basis to believe that the contract will be fully

honored. If the properly-assumed contract is then to be assigned, the non-debtor party to

the contract must have a similar basis for confidence that the contract will be fully honored

by the proposed assignee of the contract. Adequate assurance of future performance cannot

be demonstrated here if approved OTAs would relieve a new operator from successor

liability, arguably relieving it of compliance with payment adjustment and audit

compliance requirements, among others, under the Medicare statute and regulations. See

supra, Reg. Background; Section I.B.

3. The Medicare Change of Ownership Process Comports With Section 365


23

56. To satisfy both section 365 and 42 C.F.R. § 489.18(d), the Debtors cannot

“sell” the provider agreements, but must assume and assign them, cure all existing defaults

associated with them, and provide adequate assurance that a new operator will assume all

of the burdens along with the benefits arising from the assignment, including successor

liability. 11 U.S.C. § 365(a), (b); 42 C.F.R. § 489.18(d) (upon a change of ownership, the

existing provider agreement is automatically assigned to the new owner, subject to all

applicable statutes and regulations and terms and conditions under which it was originally

issued); see, e.g., Vernon, 21 F.3d at 696; Deerbrook, 235 F.3d at 1103-04; Eagle

Healthcare, 969 F. Supp. 2d at 40 (“An assigned Provider Agreement is subject to all of

the terms and conditions under which it was originally issued.”); see also In re Charter

Behavioral Health Sys., LLC, 45 Fed. Appx. 150, 151, 2002 WL 2004651, *1 n.1 (3d Cir.

June 3, 2002) (observing that “[i]f the new owner elects to take an assignment of the

existing Medicare Provider Agreement, it receives an uninterrupted stream of Medicare

payments but assumes successor liability for overpayments and civil monetary penalties

asserted by the Government against the previous owner”) (emphasis added) (citing 42

C.F.R. § 489.18(d)).

57. Applying Bankruptcy Code section 365 to the Medicare provider

agreements is consistent with the Medicare statute because it does not strip off the

Medicare overpayment liabilities from the provider agreement that a section 363(f) sale

would arguably do. A “free and clear” sale under section 363(f) sale would improperly

extinguish CMS’s rights of recoupment and setoff and impair the Medicare scheme

adopted by Congress. It would thwart a fundamental principle and purpose of the Medicare

statute, namely providing healthcare to the elderly while protecting the public fisc.


24

Vitalsigns, 396 B.R. at 240-241. Requiring the provider agreement to be assumed pursuant

to 11 U.S.C. § 365 prior to the assignment of that agreement to a third party assignee

harmonizes both the Medicare and bankruptcy statutes.

E. The Motions to Sell Violate the Anti-Assignment Act (41 U.S.C. § 6305)

58. Additionally, the Federal Anti-Assignment Act, 41 U.S.C. § 6305, also

prohibits the Debtors’ assumption and assignment of the Medicare provider agreements

without the consent of the United States.

59. The Federal Anti-Assignment Act provides:

The party to whom the Federal Government gives a contract or order may not transfer the contract or order, or any interest in the contract or order, to another party. A purported transfer in violation of this subsection annuls the contract or order so for as the Federal Government is concerned, except that all rights of action for breach of contract are reserved to the Federal Government.

41 U.S.C. § 6305.

60. The Anti-Assignment Act precludes the Debtors from selling or assuming

and assigning the Medicare provider agreements to the new operators without the consent

of the United States. See, e.g., In re Mirant Corp. , 440 F.3d 238, 252 (5th Cir. 2006)

(Under the Anti-Assignment Act, the United States may elect to continue performance or

terminate the contract when debtor seeks to assign it); In re West Electronics, Inc., 852

F.2d 79, 83-84 (3d Cir. 1988) (Anti-Assignment Act precludes debtor-in-possession from

obtaining a legally cognizable interest in [an executory] contract where the other party to

the contract, the United States, refused to consent to the assignment of the contract to the

debtor-in-possession). At present the United States has not given its consent. Accordingly,

Debtors’ Motions to Sell should be denied for this reason alone.


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F. The Motions to Sell Violate the Appropriations Clause of the Constitution

61. The Debtors and the new operators, pursuant to the Motions to Sell, the

OTAs and the Proposed Sale Order, are asking for Medicare reimbursement without being

subject to the statutorily mandated adjustments for overpayments and are asking this Court

to compel payment of Medicare funds in a manner different from that specified by

Congress. However, as noted above, the Medicare payment statute explicitly requires

adjustments be made for overpayments. Because such an order sought by the Debtors

would compel the payment of Federal Treasury funds in a manner not authorized by statute,

such an order would violate the Appropriations Clause.

62. The Appropriations Clause requires that “payments of money from the

Federal Treasury are limited to those authorized by statute.” Office of Personnel

Management v. Richmond, 496 U.S. 414, 416 (1990); see also Garland v. Sullivan, 737

F.2d 1283, 1285 (3d Cir. 1984). Medicare funds are Federal Treasury funds. 42 U.S.C.

§§ 1395i, 1395t (Medicare funds “on the books of the Federal Treasury”); see also

Anderson v. Occidental Life Ins. Co., 727 F.2d 855, 856 (9th Cir.1984) (suits against

Medicare seek recovery from the Federal Treasury).

63. The rule that money may be paid from the Treasury only on the basis of

payment obligations recognized by Acts of Congress flows directly from the Constitution.

As the Supreme Court has explained, the Appropriations Clause “assure[s] that public

funds will be spent according to the letter of the difficult judgments reached by Congress

as to the common good and not according to the individual favor of Government agents or

the individual pleas of litigants.” Richmond, 496 U.S. at 428. The statutory provisions,

created by Congress, defining the proper amount of reimbursement due a Medicare


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provider are codified at 42 U.S.C. § 1395 et. seq. Pursuant to the regulations, the Secretary

makes the determination of what a provider “should” be paid, and accordingly make any

necessary adjustments. See generally, 42 U.S.C. §§1395g and 1395n.

64. Furthermore, it is clear that the Appropriations Clause not only prohibits the

payment of Federal Treasury funds in the absence of a federal statute, see, e.g., Garland v.

Sullivan, 737 F.2d at 1285, but also in cases where a litigant seeks payment in a manner

different from or contrary to an existing statute or regulation. See e.g., Richmond, 496 U.S.

at 416 (Appropriations Clause barred payment of disability benefits where claimant did not

meet statutory criteria); Flick v. Liberty Mutual Fire Insurance Company, 205 F.3d 386,

391, 394-6 (9th Cir. 2000), cert denied 531 U.S. 927, 121 S.Ct. 305 (2000) (Appropriations

Clause barred payment to claimant under National Flood Insurance Program because

claimant failed to strictly comply with federal regulations); Md. Dept. of Human Res. v.

Dept. of Agriculture, 976 F.2d 1462, 1482 (4th Cir. 1992) (injunction preventing a federal

agency from exercising statutory authority to recover overpayments “effectively transfers

federal funds . . . without an appropriation. Such judicial action offends the Appropriations

Clause”); Downtown Medical Center/Comprehensive Health Care Clinic v. Bowen, 944

F.2d 756, 771 (10th Cir. 1991) (Appropriations Clause bars payment of Medicare monies

where conditions for payment not met).

65. The manner in which Medicare payments are to be made is defined by

statute and the court should not enter an order requiring the payment of Medicare funds in

a contrary manner. Here, the request for a “free and clear” sale that could be interpreted to

bar recoupment or adjustment of Medicare payments pursuant to the Medicare statute and

regulations arguably seeks payment of Medicare claims from the Federal Treasury in a


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manner that would prohibit the Secretary from making adjustments for overpayments

contrary to the Medicare statute mandated by Congress in 42 U.S.C. §1395g(a) and

therefore, in violation of the Appropriations Clause.

G. The Motions to Sell and Proposed Sale Order Violate SSA Laws

66. The Motions to Sell, OTAs, and Proposed Sale Order also fail to preserve

the rights of SSA by vitiating SSA laws and the protections they provide to the

beneficiaries.

67. As described above, the Debtors are representative payees for more than

1,000 Social Security beneficiaries in their care at their facilities.12 Also, as the

representative payee for many Social Security beneficiaries, the Debtors may have

accumulated unspent Social Security benefits on behalf of some of those individuals in the

“Resident Trust Funds” or in other accounts.

68. Social Security benefits belong to the beneficiary and are protected against

legal process and assignment. The Social Security Act provides, “[t]he right to any person

to any future [benefit] payment … shall not be transferable or assignable, at law or in

equity, and none of the moneys paid or payable or rights existing … shall be subject to

execution, levy, attachment, garnishment, or other legal process, or to the operation of any

bankruptcy or insolvency law.” 42 U.S.C. §§ 407(a), 1383(d)(1); see also 20 C.F.R.

§§ 404.1820, 416.533. The Social Security Act “express[es] the clear intent of Congress

12 Subject to some exceptions, the Privacy Act and the Social Security Act and regulations prohibit SSA’s release/disclosure of an individual’s information without the consent of the individual or an order of a court of competent jurisdiction. See 5 U.S.C. § 552a(b); 42 U.S.C. § 1306; 20 C.F.R. §§ 401.100, 401.105, 401.110, 401.115, 401.180. Because of these restrictions, SSA refers to generally applicable law as it relates to the above-referenced Motions to Sell and has not identified any information on any particular beneficiaries.


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to protect Social Security payments from the bankruptcy process.” In re Ragos, 700 F.3d

220, 223 (5th Cir. 2012); In re Baker, 214 B.R. 489, 490 (Bankr. S.D. Ohio 1997) (social

security benefits received by debtor in representative payee capacity for beneficiary were

not property of the estate); SSA’s Program Operations Manual System (POMS) GN

02410.001 (the Social Security Act “prohibit[s] the transfer of control over money to

someone other than the beneficiary, recipient, or the representative payee”).

69. The Social Security Act and regulations provide that SSA is exclusively

responsible for determining whether a representative payee is needed and for selecting a

representative payee, and set forth the rights and responsibilities of representative payees

with regard to the use of Social Security benefits they receive on behalf of beneficiaries.

See 42 U.S.C. §§ 405(j), 1383(a)(2); 20 C.F.R. §§ 404.2001-404.2065, 416.601-416.665.

After SSA determines that a beneficiary needs a representative payee, SSA’s regulations

and operating procedures require that it exercise “extreme care” in investigating and

selecting who will serve as the beneficiary’s representative payee. See Cannon v. Apfel,

213 F.3d 970, 972 (7th Cir. 2000) (citing SSA’s POMS GN 00501.005(C)); 20 C.F.R.

§§ 404.2020-404.2024, 416.620-416.624 (explaining SSA’s process for determining who

SSA will select as the representative payee). The Social Security Act provides that SSA

must investigate a potential representative payee and find “adequate evidence” that the

payment of the individual’s Social Security benefits to the representative payee is “in the

interest” of the individual. See 42 U.S.C. §§ 405(j)(2)(A), (B), 1383(a)(2)(A), (B); see also

20 C.F.R. §§ 404.2001-404.2015, 416.601-416.615 (explaining SSA’s process for

determining when benefits should be paid to a representative payee).


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70. The Motions to Sell and OTAs are unclear about whether they purport to

transfer representative payee status to the new operators. Section 2.3 of the OTAs refers

to the transfer of Resident Trust Funds. To the extent that the Debtors are attempting to

transfer their status as a representative payee, they cannot do so, because any attempt to

transfer the Debtors’ representative payee status to another entity would violate the Social

Security Act and its implementing regulations giving SSA exclusive authority to approve

a representative payee. A bankruptcy sale cannot strip away the Debtors’ and new

operators’ regulatory requirements. In re Welker, 163 B.R. 488 (Bankr. N.D. Tex. 1994)

(trustee could not sell real property without complying with procedures of U.S. Dept. of

Housing and Urban Development).

71. Moreover, the Debtors’ status as representative payees is not property of the

estate. Property of the estate excludes any power that the debtor may exercise solely for

the benefit of an entity other than the debtor. 11 U.S.C. § 541(b)(1). In this situation, the

Debtors’ receipt and custodianship of SSA benefits is a power that they may exercise solely

for the benefit of the individuals who own the SSA benefits. As the beneficiaries’

representative payees, the Debtors must use their SSA benefits for the “use and benefit” of

the beneficiaries—the Debtors cannot use the Social Security benefits for their own needs

or purposes. See 42 U.S.C. §§ 405(j)(1)(A), 1383(a)(2)(A); see also 20 C.F.R.

§§ 404.2035-404.2040, 416.635-416.640. Because the Debtors’ status as representative

payees is not property of the estate, the Debtors cannot transfer this status pursuant to

section 363.

72. Additionally, the Debtors’ application by which they became representative

payees is not an executory contract that can be assumed and assigned pursuant to 11 U.S.C.


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§ 365. The Debtors are obligated to follow SSA statutes and regulations, but have no

agreement or contract with SSA to perform the duties of a representative payee.

73. Similarly, the Motions to Sell and OTAs are unclear about whether they

purport to transfer any accumulated unspent Social Security benefits to the new operators

through the transfer of the “Resident Trust Funds” in section 2.3 of the OTA. The transfer

of Social Security benefits to the new operators would violate Social Security regulations

on the transfer of accumulated funds. See 20 C.F.R. §§ 404.2060, 416.660. And clearly

SSA benefits, including accumulated benefits in the Resident Trust Accounts or elsewhere,

are property of beneficiaries and not property of the estate or subject to section 363.

74. Any new operator must first apply and be confirmed by SSA as the new

representative payee for each individual resident/beneficiary. After this, SSA would have

no objection to any accumulated Social Security benefits being transferred from the old

payee to the new payee, and indeed such funds must be transferred from the Debtors to the

successor representative payee(s). See 20 C.F.R. §§ 404.2060, 416.660.. See 20 C.F.R.

§§ 404.2060, 416.660.

75. In sum, the Debtors and new operators must abide by SSA laws, and to the

extent the Motions to Sell request waiver or release of their obligations to comply with

those laws, the Motions to Sell should be denied.

II. The Motions to Compromise are Objectionable

76. As the Debtors discuss in the Motions to Compromise, a rule 9019

settlement must be fair and equitable and take into consideration the interests of the

creditors impacted by the settlement.


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77. The Motions to Compromise are intertwined with the Motions to Sell, as

evident in the entry of a “9019 Order” being a condition precedent to the sale transactions

closing. See sections 7.1 and 7.2 of the OTAs. As part and parcel of one transaction, the

Motions to Compromise are objectionable for the same reasons as are the Motions to Sell.

CONCLUSION

For the foregoing reasons, the United States respectfully requests that the Court

deny the Motions to Sell and the Motions to Compromise unless the rights of CMS and

SSA are properly preserved.

DATED: March 14, 2019

Respectfully submitted,

JOSEPH H. HUNT Assistant Attorney General Civil Division ERIN NEALY COX

United States Attorney /s/ Leah V. Lerman_ RUTH A. HARVEY MARGARET M. NEWELL LEAH V. LERMAN, Trial Attorney Civil Division U. S. Department of Justice P. O. Box 875 Ben Franklin Station Washington, D.C. 20044-0875 T (202) 307-0452 F (202) 514-9163 ATTORNEYS FOR THE UNITED STATES


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Certificate of Service

On March 14, 2019, I electronically submitted the foregoing document with the

clerk of court for the U.S. Bankruptcy Court, Northern District of Texas, using the

electronic case filing system of the court. I hereby certify that I have served all parties

electronically or by another manner authorized by Federal Rule of Civil Procedure

5(b)(2).

/s/ Leah V. Lerman Leah V. Lerman Trial Attorney


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