In re: THG Holdings, et al.
MEMORANDUM OPINION. Signed by Judge Richard G. Andrews on 9/9/2020. (nms)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
IN RE THGH LIQUIDATING LLC, et al.,
: Chapter 11
: Case No. 19-11689 (JTD)
: (Jointly Administered)
ALEX M. AZAR II, in his official capacity as
Secretary, United States Department of Health
and Human Services; and SEEMA VERMA, in her :
official capacity as Administrator, Centers for
Medicare and Medicaid Services,
: Civ. No. 19-2215-RGA 1
THGH LIQUIDATING LLC, et al.,
Joseph H. Hunt, Assistant Attorney General; David C. Weiss, United States Attorney; Ellen W.
Sleights, Assistant United States Attorney, Wilmington Delaware; Ruth A. Harvey, Lloyd H.
Randolph, Seth B. Shapiro, Andrew Warner, Commercial Litigation Branch, Civil Division, U.S.
Department of Justice, Washington, D.C., attorneys for appellant, the United States.
Derek C. Abbott, Curtis S. Miller, Daniel B. Butz, Morris Nichols Arsht & Tunnell LLP,
Wilmington, Delaware, attorneys for appellees, the TH Liquidating Trust and the Liquidating
September 9, 2020
The parties inconsistently caption this case. I have adopted Appellees’ version. (D.I. 18).
/s/ Richard G. Andrews
ANDREWS, UNITED STATES DISTRICT JUDGE:
Appellants, Alex M. Azar II, as Secretary of the United States Department of Health and
Human Services (“HHS”), and Seema Verma, as Administrator of the Centers for Medicare and
Medicaid Services (“CMS,” and, together with HHS, the “Government”) have appealed the plan
confirmation order, dated November 27, 2019 (D.I. 1-1) 2 (“Confirmation Order”), entered in the
Chapter 11 cases of True Health Diagnostics, LLC (“True Health”) and certain of its affiliates
(“Debtors”). For the reasons set forth below, the Confirmation Order is affirmed.
The Chapter 11 Cases and Adversary Proceeding
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 payments
to 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 –
Citations to docket items are to the docket in this case unless otherwise indicated. The docket of
the Chapter 11 cases, captioned In re TGH Holdings LLC, No. 19-11689 (JTD) (Bankr. D. Del.),
is cited as “B.D.I. __.” The docket of the adversary proceeding, captioned Azar. v. True Health
Diagnostics, LLC, Adv. No. 19-50280 (JTD) (Bankr. D. Del.), is cited as “Adv. D.I. __.”
that were reviewed as part of the original 2017 suspension and investigation. Id.
On July 30, 2019 (the “Petition Date”), True Health and certain affiliates filed voluntary
petitions for relief under chapter 11 of the Bankruptcy Code. True Health also initiated an
adversary proceeding by filing a complaint and moving for a preliminary injunction against the
Government to enforce the automatic stay and to enjoin the Government from withholding
Medicare payments for post-petition services rendered by True Health. (See Adv. D.I. 1, 3, 4).
The Payment Order and Appeal
On August 29, 2019, the Bankruptcy Court granted the motion for preliminary injunction.
True Health Diagnostics LLC v. Azar (In re THG Holdings LLC), 604 B.R. 154 (Bankr. D. Del.
2019); see Adv. D.I. 28 (the “Payment Order”). The Bankruptcy Court held that it had
jurisdiction under the Third Circuit’s decision in University Medical Center 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. 604 B.R. at 159. The Bankruptcy Court
further held that “the post-petition Medicare reimbursements are indisputably property of the
estate” under § 541(a) of the Bankruptcy Code, and that CMS’s withholding of such payments
after True Health’s bankruptcy filing was a violation of the automatic stay under § 362(a) of the
Bankruptcy Code. Id. at 160-61.
The Bankruptcy Court rejected the Government’s contention that withholding Medicare
payments to True Health fit within the police power exception to the automatic stay under §
362(b)(4) of the Bankruptcy Code. Id. at 161. Prior to the hearing on the preliminary injunction
motion, the Government represented to the Bankruptcy Court that it would not submit any
evidence at the hearing. Id. at 160 n.3. Notwithstanding that agreement, at the hearing the
Government asserted that there were post-petition fraud allegations that were being investigated
and attempted to introduce declarations. The Court sustained True Health’s objection to the
introduction of the declarations. (See Adv. D.I. 25 at 28:1-29:16). Accordingly, the Bankruptcy
Court entered the Payment Order, which, among other things, required the Government to
continue making Medicare payments owed to True Health on or after the Petition Date (“Ordered
Payments”). (See Adv. D.I. 28). The Payment Order was set to expire 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 12, 2019, the Government filed a timely notice of appeal of the Payment
Order. (Azar v. True Health Diagnostics, LLC, Civ. No. 19-1714-RGA, D.I. 1). The Bankruptcy
Court and I both denied stays pending appeal. (Id., D.I. 9 at 2; D.I. 31 at 33-41). I later
dismissed the interlocutory appeal. (Id., D.I. 48, 49).
Each party moved to dismiss the adversary proceeding. The Bankruptcy Court entered an
order denying both motions to dismiss on July 7, 2020. (Adv. D.I. 93, 94). Thus, the adversary
proceeding is pending.
The Confirmation Order and Appeal
The Bankruptcy Court approved sales of substantially all of the Debtors’ business on
September 20, 2019 and October 30, 2019. (See B.D.I. 271, 432). In connection with winding
down the Debtors’ estates, the Debtors engaged in negotiations with their secured lenders and the
official committee of unsecured creditors to formulate terms of a liquidating chapter 11 plan
(B.D.I. 508) (as amended, the “Plan”). After interim approval by the Bankruptcy Court, votes on
the Plan were solicited from creditors, and the Plan was overwhelmingly accepted by all classes
of claims entitled to vote. (See id.) Classes 3 and 4 in the Plan, which represent secured claims
against the Debtors entitled to vote, unanimously accepted the Plan. (See id.) Class 5, which
represents holders of unsecured claims, accepted the Plan by a wide margin. (See id.)
On November 26, 2019, the Bankruptcy Court held a confirmation hearing to consider
final approval of the Debtors’ disclosure statement and final confirmation of portions of the Plan
to which the Government had objected. Prior to the confirmation hearing, the Debtors and the
Government entered into a stipulation governing the evidence to be admitted at the confirmation
hearing (B.D.I. 498) (the “Stipulation”). Pursuant to the Stipulation, the Government agreed that
it would not introduce any evidence challenging the Debtors’ evidence that they provided
valuable and necessary services in exchange for the Ordered Payments. (See Stipulation, ¶ 8).
The Government also stipulated that it would not offer any evidence of misconduct by the
Debtors or evidence supporting an administrative expense claim. (See id.)
As noted by the Bankruptcy Court, “The Government, in its closing argument, agreed
that it was limiting its objections to feasibility, good faith, and the scope of the releases being
provided under the terms of the Plan.” (D.I. 6-2 at 75:1-4). Following oral argument, the
Bankruptcy Court overruled each of the Government’s remaining objections. (Id. at 75:1-81:1).
On November 27, 2019, the Bankruptcy Court entered the Confirmation Order in accordance
with its ruling. (D.I. 1-1). The Bankruptcy Court stated that it would deny any motion for a stay
without a hearing. (See D.I. 6-2 at 82:13-83:13).
On December 1, 2019, the Government filed a notice of appeal with respect to the
Confirmation Order together with an emergency motion for stay pending appeal. (D.I. 1, 2). On
December 5, 2019, I issued an order denying the emergency motion. (D.I. 9). The merits of the
appeal are fully briefed. (D.I. 16, 18, 20). The Court did not hear oral argument because the
facts and legal arguments are adequately presented in the briefs and record, and the decisional
process would not be significantly aided by oral argument.
JURISDICTION AND STANDARD OF REVIEW
Appeals from the Bankruptcy Court to this Court are governed by 28 U.S.C. § 158.
District courts have mandatory jurisdiction to hear appeals “from final judgments, orders, and
decrees.” 28 U.S.C. § 158(a)(1). The Confirmation Order is a final order. The standard of
review is de novo for legal issues and clearly erroneous for factual determinations. In re Global
Industrial Techs., Inc., 645 F.3d 201, 209 (3d Cir. 2011) (en banc). The Government raises
three issues on appeal, and it asserts this Court’s review is de novo. Debtors do not challenge
this assertion. Thus, although I have some reservations about whether the feasibility and good
faith issues (IV.B and IV.C infra) are entirely legal, I treat all issues raised by the Government as
being subject to de novo review.
The Government contends that the Bankruptcy Court erred in confirming the plan
because it ignored the Government’s argument that the Payment Order was entered in
contravention of In re Denby-Peterson, 941 F.3d 115 (3d Cir. 2019), a decision that was issued
by the Third Circuit two months after the entry of the Payment Order.
The Government further contends that the Bankruptcy Court erred in determining that the
Plan was feasible, as required under § 1129(a)(11) of the Bankruptcy Code, and submitted in
good faith as required under § 1129(a)(3) of the Bankruptcy Code, because the Debtors will lack
funds to return the Ordered Payments in full upon reversal of the erroneously entered Payment
Finally, because there was no stay of the Confirmation Order, the Plan became effective
and was substantially consummated on December 6, 2019, and True Health contends that the
appeal is now equitably moot and should be dismissed.
Under § 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically
triggers the automatic stay. 11 U.S.C. § 362. Subsection (a)(3) prohibits “any act to obtain
possession of property of the estate . . . or to exercise control over property of the estate.” 11
U.S.C. § 362(a)(3). The purpose of the automatic stay is two-fold:
(1) to protect the debtor, by stopping all collection efforts, harassment, and
foreclosure actions, thereby giving the debtor a respite from creditors and a
chance “to attempt a repayment or reorganization plan or simply be relieved of
the financial pressures that drove him [or her] into bankruptcy;” and (2) to protect
“creditors by preventing particular creditors from acting unilaterally in selfinterest to obtain payment from a debtor to the detriment of other creditors.”
Constitution Bank v. Tubbs, 68 F.3d 685, 691 (3d Cir. 1995) (quoting Maritime Elec. Co. v.
United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir. 1991)).
Denby-Peterson Does Not Require Reversal of the Payment Order
In University Medical Center, the Third Circuit considered the precise issue in this case –
whether the automatic stay under § 362(a) prohibits the government’s post-petition withholding
of Medicare payments to a healthcare provider in bankruptcy. University Medical Center, 973
F.2d at 1072. In that case, HHS withheld interim payments due to healthcare provider UMC for
post-petition services on a theory of “contractual recoupment” (id. at 1071) for HHS’s
overpayment for prepetition services. The Third Circuit determined such withholding to be a
violation of the automatic stay. Id. at 1075. The Third Circuit emphasized the importance of the
automatic stay to preserve a financially troubled Medicare provider with the opportunity to
reorganize and continue Medicare benefits. Id. at 1084. The Third Circuit further noted that “we
are not holding that HHS can never recover the reimbursement overpayments made to UMC,
only that HHS cannot ignore the reach of the automatic stay in its effort to attain an
administrative priority over UMC’s other general creditors.” Id. at 1084-85. The Bankruptcy
Court relied on this precedent in enforcing the automatic stay and ordering the Government to
pay True Health for post-petition services rendered.
The Government argues that the Third Circuit’s decision in Denby-Peterson implicitly
overruled the earlier ruling in University Medical Center. I disagree. Denby-Peterson does not
overrule University Medical Center, and it is distinguishable from the facts in this case.
Denby-Peterson involved a secured creditor’s failure, following notice of the debtor’s
bankruptcy, to return collateral (a car) lawfully repossessed pre-petition. It addressed the issue
of whether the secured creditor violated the automatic stay by maintaining possession of the
collateral. Denby-Peterson, 941 F.3d at 123. In its analysis, the Third Circuit stressed that “one
of the automatic stay’s primary purposes is to maintain the status quo between the debtor and
[his] creditors.” Id. at 126 (internal quotations omitted). The Third Circuit found that, although
the secured creditor retained possession of the debtor’s property post-petition, there was no
violation of the automatic stay because there was no “post-petition affirmative act” by the
creditor to exercise control over the debtor’s property — the creditor was only preserving the
“status quo” by continuing to withhold the property. Id. at 125-26. Thus, “exercis[ing] control
over the [property of the estate] by keeping it in their possession after learning of the bankruptcy
filing” does not qualify as a stay violation because it is “merely passively retain[ing] th[e] same
possession” of property that the party had pre-petition.
The Bankruptcy Court distinguished Denby-Peterson in its decision confirming the Plan:
The situation here is very different. The Government took action postpetition to obtain
possession of the property of the debtors’ estate by withholding payments for work
performed by the debtors postpetition. Every time an invoice was submitted for payment,
the Government made the determination not to pay that invoice. That is action postpetition; and, therefore, … the ruling in Denby-Peterson is simply not applicable here.
(D.I. 6-2 at 76:5-12). On appeal, the Government argues that, because its decision to suspend
True Health and withhold reimbursements was made pre-petition, the decision to continue
withholding post-petition payments is not an affirmative act — a requirement set forth in DenbyPeterson — but rather a preservation of the status quo. (D.I. 16 at 7). Even if CMS were
making a new individual determination not to pay each invoice, the Government argues, DenbyPeterson makes clear that a creditor’s withholding of property is permitted because it is merely
“keeping it in [the creditor’s] possession.” (Id. (citing Denby-Peterson, 941 F.3d at 126)). The
Government relies on the dictionary definition of withhold as “to hold back from action,” “to
keep in custody,” or “to refrain from granting, giving, or allowing.” (Id.) By misconstruing
withholding payment as an affirmative act, the Government asserts, the Bankruptcy Court made
preservation of the status quo impossible.
The status quo argument is unavailing. To the extent the Debtors continued to provide
services to Medicare customers, notwithstanding the bankruptcy filing, the situation changed
each day post-petition. As the Bankruptcy Court aptly noted, the secured creditor in DenbyPeterson “only repossessed property in which it held a pre-petition security interest.” (Adv. D.I.
93 at 4-5). Here, the Government withheld post-petition payments for laboratory tests and
services that True Health performed post-petition. Thus, unlike Denby-Peterson, the
Government “did not merely retain the same possession and control over the Debtor’s prepetition property. Rather, by withholding Medicare payments for services performed postpetition, the [Government] engaged in affirmative acts to exercise control over post-petition
property of the estate in violation of the automatic stay.” (Id. at 5). As True Health correctly
points out, the automatic stay also prohibits “the commencement or continuation . . . of a
judicial, administrative, or other action or proceeding against the debtor that was or could have
been commenced before the commencement of the case.” (D.I. 18 at 10 n.3 (citing 11 U.S.C. §
362(a)(1))). The Government’s withholding of the Ordered Payments was a clear continuation
of a “proceeding or other action” commenced before the commencement of the case.
Denby-Peterson does not mention University Medical Center. Moreover, DenbyPeterson was not issued by an en banc panel and thus did not overrule University Medical
Center under the Third Circuit’s internal guidelines. See Internal Operating Procedures of the
United States Court of Appeals for the Third Circuit (2018) § 9.1; Association of New Jersey
Rifle & Pistol Clubs Inc. v. Attorney General New Jersey, ___ F.3d ___, 2020 WL 5200683, at
*4 (3d Cir. Sept. 1, 2020). In addition, I am persuaded that the facts of Denby-Peterson differ
significantly from the facts at issue here. University Medical Center remains good law and
binding precedent recognizing that withholding of Medicare payments for post-petition services
performed by a healthcare provider in bankruptcy constitutes a violation of the automatic stay.
Even Assuming the Payment Order Is Reversed or Vacated, the Government
Failed to Establish Administrative Expense Status in Support of its Plan
In addressing the Government’s Plan feasibility objection, the Bankruptcy Court noted:
The Government continues that it should be able to recover payments without
showing, under Section 503(b) of the Code, that the payments are an
administrative claim. Notably, the Government cites no authority that it should be
exempt from that provision of the Code, and the Court is not aware of any such
exemption for the Government.
(D.I. 6-2 at 78:5-10). The Bankruptcy Court ruled, “The Government’s claim to recover . . . is,
in effect, a claim to recover for pre-petition claims for alleged fraud and overpayments that
occurred pre-petition, and therefore constitute pre-petition claims.” (Id. at 77:25-78:4).
According to the Government, the Bankruptcy Court erred in entering the Confirmation
Order because the Plan was not feasible under § 1129(a)(11) of the Bankruptcy Code. Even a
planned liquidation must be feasible, it argues, and in considering feasibility, “a bankruptcy court
must evaluate the possible impact of the debtor’s ongoing civil litigation.” In re Am. Capital
Equip., LLC, 688 F.3d 145, 156 (3d Cir. 2012). The Government argues that the Bankruptcy
Court should have taken into account the Government’s high probability of success in the
adversary proceeding, with the result that a return of the Ordered Payments in full will be
required. As the Plan does not contain a claim reserve or other means for CMS to recover under
the Plan if a court orders return of the Ordered Payments, the Government argues, the Plan
should not have been confirmed. (D.I. 16 at 9-10; D.I. 20 at 8-11).
Conversely, True Health argues that the Government has never explained what regulation
or provision of the Bankruptcy Code would require the return of the Ordered Payments, and the
Government is merely attempting to circumvent the Bankruptcy Code’s priority scheme and
secure a finding that it would be automatically entitled to a return of the Ordered Payments if it
were eventually successful. (See D.I. 18 at 11). To be returned in full, the Ordered Payments
would have to qualify as an administrative expense of the Debtors’ estates. However, True
Health asserts, the Ordered Payments do not represent a claim by the Government against the
estate. Rather, the Debtors had a contractual right to such payments for services actually
rendered by the Debtors, and the Government presented the Bankruptcy Court with no evidence
to the contrary. (See id.)
Unlike unsecured claims governed by § 502 of the Bankruptcy Code, “requests for
payment of administrative expenses are not entitled to the presumption of correctness that is
accorded claims that prepetition creditors assert through proofs of claim. An entity seeking
allowance of an administrative expense has the burden of proof.” 4 COLLIER ON BANKRUPTCY ¶
503.04 (Richard Levin & Henry J. Sommers, eds. 16th ed.); see In re SRC Liquidation, LLC,
573 B.R. 537, 540 (Bankr. D. Del. 2017) (“The claimant bears the ultimate burden of
establishing a valid administrative expense claim by a preponderance of the evidence.”). The
Government argues that disputed administrative expense claims are not resolved at confirmation
hearings, but rather after a separate notice and hearing. (See D.I. 20 at 9). However, a claimant
has the burden even when it is simply requesting that a bankruptcy court estimate an
administrative claim for the purpose of establishing a claims reserve. See In re FRG, Inc., 121
B.R. 451, 456 (Bankr. E.D. Pa. 1990) (allocation of the burden of proof in a claim estimation is
the same as in deciding objections to proofs of claim).
The record supports True Health’s arguments. Despite holding the burden of proof under
§ 503(b) of the Bankruptcy Code, the Government presented no evidence to demonstrate that the
Ordered Payments represented (or could represent) claims entitled to administrative priority. As
True Health points out, the Government stipulated not to offer any proof of any administrative
expense claim in connection with its objection to the entry of the Confirmation Order. (B.D.I.
498 at 3-4). Moreover, the Bankruptcy Court found that the Ordered Payments were earned by
the Debtors during the bankruptcy cases, which clearly undermines the Government’s theory that
it would be entitled to the return of the Ordered Payments:
And I would also conclude that, in this case, contrary to the Government’s
position, the post-petition payments, if reversed, would not constitute unjust
enrichment because the payments … made by the Government here were for work
performed post-petition, and the Government has stipulated, for purposes of the
confirmation hearing, that the debtors did not engage in any post-petition fraud or
receive any post-petition overpayments; therefore, that objection is overruled.
(D.I. 6-2 at 76:20-77:3). Indeed, the record reflects that the only testimony at the hearing was
that the Ordered Payments were made for services actually rendered. (See id. at 12:9-13:24,
The Government fails to explain how it is entitled to the return of the Ordered Payments
under the Bankruptcy Code if the Payment Order is reversed. Absent a statutory mechanism to
do so, such as proving an entitlement to a secured claim or an administrative expense, the
Government has no automatic right to payment if it succeeds in its appeal; while the Government
may have a claim against the Debtors’ estate, that claim is not entitled to priority under the
Bankruptcy Code. Having stipulated not to offer any proof of any administrative expense claim
in connection with its objection to the entry of the Confirmation Order, the Government cannot
now claim that the Plan was not feasible on the basis that it might have an administrative
expense claim for the return of the Ordered Payments. The Government did not present
evidence, authority, or even a valid legal theory. Thus, the Bankruptcy Court did not err in
overruling the Government’s plan feasibility objection based on an inadequate administrative
The Bankruptcy Court Did Not Err in Determining that the Plan Was
Proposed in Good Faith
According to the Government, the Debtors have aimed throughout the bankruptcy case to
extract money from the Government to pay other creditors, and, in doing so, the Debtors have
not dealt with creditors with fundamental fairness, nor proposed the Plan with good intention.
The Government further asserts that it is inconsistent with the Bankruptcy Code’s objectives for
a debtor to attempt to prevent a creditor from vindicating its proper rights under the Bankruptcy
Code by taking actions that serve no purpose other than to moot an appeal.
A reorganization plan may be confirmed only if it “has been proposed in good faith and
not by any means forbidden by law.” 11 U.S.C. § 1129(a)(3). See, e.g., In re W.R. Grace & Co.,
729 F.3d 332 (3d Cir. 2013). Under Third Circuit law, “good faith” requires that a “plan be
‘proposed with honesty, good intentions and a basis for expecting that a reorganization can be
effected with results consistent with the objectives and the purposes of the Bankruptcy Code.’”
In re Zenith Elecs. Corp., 241 B.R. 92, 107 (Bankr. D. Del. 1999) (quoting In re Sound Radio,
Inc., 93 B.R. 849, 853 (Bankr. D.N.J. 1988)); see also In re PPI Enters. (U.S.), Inc., 228 B.R.
339, 347 (Bankr. D. Del. 1998) (“[C]ourts have held a plan is to be considered in good faith “if
there is a reasonable likelihood that the plan will achieve a result consistent with the standards
prescribed under the Code.”). Courts have held that § 1129(a)(3) requires that a plan “(1) fosters
a result consistent with the Code’s objectives, (2) the plan has been proposed with honesty and
good intentions . . . and (3) there was fundamental fairness in dealing with the creditors.” In re
Genesis Health Ventures, Inc., 266 B.R. 591, 609 (Bankr. D. Del. 2001) (internal citations
omitted). “[G]ood faith is to be determined by the totality of the circumstances.” Sandy Ridge
Dev. Corp. v. Louisiana National Bank (In re Sandy Ridge Dev. Corp.), 881 F.2d 1346, 1353
(5th Cir. 1989).
The Government argues that the Plan’s failure to provide an adequate reserve or
mechanism for recovery was intentional, and the Plan did not satisfy the good faith prerequisite
of § 1129(a)(3) because it was intended to deprive the Government of its ability to recover the
Ordered Payments if it prevailed in the automatic stay litigation. (D.I. 20 at 11). According to
the Government, nothing in the Bankruptcy Code will preclude the Bankruptcy Court or an
appellate court from reversing the Payment Order and ordering return of the Ordered Payments
under principles of restitution and unjust enrichment. The Government asserts that allowing the
Debtors to retain funds that were improperly received under a preliminary order, while depriving
a remedy to the person forced to pay, defies any notion of fairness. (Id. at 12).
In my view, this argument misses the point. The Government failed to offer any legal
authority or theory that would support an entitlement to the return of the Ordered Payments. The
Government merely argues that the Debtors never had a right to the Ordered Payments, and that
it has a right to a return of the Ordered Payments. This argument is irrelevant to any
determination that the plan proponents (which included the Debtors’ secured lenders and the
official committee of unsecured creditors) proposed the Plan in good faith.
The Government asserts that the Debtors’ lack of good faith is evident based on the fact
that the estate has or had funds that could have been placed into a separate reserve and instead
will be used to make a distribution to other creditors, even though nothing about the bankruptcy
case warranted immediate consummation of the Plan and distribution of funds. Rather, “the rush
to distribute initial distributions appeared to be a deliberate effort to deprive the United States not
just of recovery, but also of an opportunity to have the [adversary proceeding] decided on the
merits.” (Id. at 14). The Government failed to introduce any evidence that the Debtors were
deliberately seeking to avoid the Government’s claim or to moot an appeal of the Payment
Order. Administering a liquidation case as quickly as possible is hardly unusual; such a strategy
reduces costs and professional fees and usually offers the best possible chance for any recovery
by creditors. Mere supposition that the bankruptcy case was rushed in order to preclude the
Government’s recovery is insufficient to support a finding that the Plan was proposed in bad
In support of plan confirmation, including the good faith requirement of § 1129(a)(3), the
Debtors filed a memorandum in support of confirmation and a declaration. (B.D.I. 507, 508).
The uncontroverted evidence attests that the Plan was proposed with the honest intention of
maximizing value for the Debtors, their estates, and their creditors. The Plan provides for a
litigation trust that is the best chance for recovery for unsecured creditors who would otherwise
receive nothing. The Court finds no error in the Bankruptcy Court’s determination that the Plan
was proposed in good faith, and the record reflects that the Government failed to introduce any
evidence to the contrary.
In its answering brief, True Health suggests that the appeal should be dismissed on the
basis of equitable mootness, as the Confirmation Order was not stayed and the Plan has been
substantially consummated. True Health, however, did not file a motion to dismiss on this basis.
Having now decided the appeal on the merits, I need not consider whether the doctrine of
equitable mootness should apply here. Even if I were to consider True Health’s request for
dismissal on this basis, I would not grant it. A court must apply the doctrine of equitable
mootness “with a scalpel rather than an axe . . . , a court may fashion whatever relief is
practicable instead of declining to review simply because full relief is not available.” Tribune
Media Co. v. Aurelius Capital Mgmt., 799 F.3d 272, 278 (3d Cir. 2015). As reflected in the
record of the confirmation hearing, all parties agreed that, if the Government succeeds in the
adversary proceeding and proves that it holds an administrative expense for the Ordered
Payments, it would likely receive some recovery under the Plan. As Debtors’ counsel stated:
The plan sets forth very clearly, in accordance with the Code and the rules, the
ways in which they can recover it. They filed claims. If they are able to be
successful on appeal – we don’t think that they will be – but if they are successful
on appeal, they will then have to go through the claims allowance process and
prove up an administrative claim, to be able to recover . . .
(D.I. 6-2 at 72:18-25). As the Bankruptcy Court similarly noted, there is “a process that can
happen through the claims process, whether it’s a pre-petition claim or a post-petition claim.”
(Id. at 63:2-4). The Court agrees with the Government that, because the liquidation trust
established under the Plan has or is likely to have some assets that could be used to make some
repayment in the event of a successful administrative expense claim, some relief remains
possible, and this appeal is not equitably moot.
For the reasons set forth herein, the Confirmation Order is affirmed. A separate order
will be entered.
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