United States of America et al v. Vanguard Healthcare, LLC et al
MEMORANDUM OPINION OF THE COURT. Signed by Chief Judge Kevin H. Sharp on 3/13/17. (DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(af)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF TENNESSEE
UNITED STATES OF AMERICA and
STATE OF TENNESSEE,
VANGUARD HEALTHCARE, LLC,
SERVICES, LLC, BOULEVARD
TERRACE, LLC, VANGUARD OF
CRESTVIEW, LLC, GLEN OAKS,
LLC, IMPERIAL GARDENS HEALTH )
AND REHABILITATION, LLC,
VANGUARD OF MEMPHIS, LLC,
VANGUARD OF MANCHESTER, LLC, )
and MARK MILLER,
Contemporaneously with the filing of a 268-paragraph, 59-page Complaint, Plaintiffs, the
United States of America and the State of Tennessee, filed a “Joint Motion for an Order That Their
Pending False Claims Act Civil Action is Legally Excepted From the Automatic Stay in
Bankruptcy” (Docket No. 2). Defendants oppose that Motion (Docket No. 18). Also pending is
Defendants’ “Motion to Stay Response to Plaintiffs’ Complaint” (Docket No. 10), which Plaintiffs
do not oppose (Docket No. 18). Both Motions will be granted.
As the title of Plaintiffss Motion suggests, this is primarily a False Claims Act case brought
pursuant to 31 U.S.C. §§ 3729-3733. In its simplest form, Plaintiffs allege that five nursing homes
operated by Defendants knowingly billed Medicare and TennCare for grossly substandard services
that resulted in improper care and severe physical and emotional harm to the nursing home residents.
Plaintiffs also allege that four of those nursing homes and another one submitted pre-admission
evaluations to TennCare that contained forged and/or photocopied signatures.
The allegations were investigated by the Tennessee Bureau of Investigation and the United
States Department of Health and Human Services. Plaintiffs claim that, after conversations with
counsel for most of the Defendants, a formal meeting was scheduled in which Plaintiffs intended
to present their findings. However, that meeting did not take place because the corporate Defendants
filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.
“As a general rule, the filing of a bankruptcy petition operates to stay, among other things,
the continuation of a judicial proceeding against the debtor that was commenced before the petition.”
Dominic’s Rest. of Dayton, Inc. v. Mantia, 683 F.3d 757, 760 (6th Cir. 2012). It also operates to stay
“the commencement . . . of a judicial, administrative or other action or proceeding against the debtor
that was or could have been commenced before the commencement of the [bankruptcy] case . . . or
to recover a claim against the debtor that arose before the commencement of the bankruptcy case.”
11 U.S.C. § 361(a)(1).
“The purpose of the automatic stay is to ‘give[ ] the debtor a breathing spell from his
creditors.’” In re Robinson, 764 F.3d 554, 559 (6th Cir. 2014) (citation omitted). Thus,
[i]t stops all collection efforts, all harassment, and all foreclosure actions. It permits
the debtor to attempt a repayment or reorganization plan, or simply to be relieved of
the financial pressures that drove him into bankruptcy.
Id. “In effect, the stay offers debtors a ‘new opportunity’ to organize their financial affairs,
‘unhampered by the pressure and discouragement of pre-existing debt.’” Id. (quoting Local Loan
Co. v. Hunt, 292 U.S. 234, 244 (1934)).
“But the automatic stay protection does not apply in all cases; there are statutory exemptions,
and there are non-statutory exceptions.” Dominic's Rest., 683 F.3d at 760.
Thus, while the
automatic stay “‘repel[s] . . . many prepetition collection actions, [s]ome governmental attacks on
the estate . . . penetrate the barrier.’” In re Robinson, 764 F.3d at 559 (quoting In re Javens, 107
F.3d 359, 363 (6th Cir. 1997)).
One such exception for a governmental attack, and the one on which Plaintiffs rely, deals
with the enforcement of police or regulatory powers. More specifically, the Bankruptcy Code
provides that the filing of a petition does not operate as a stay of
the commencement or continuation of an action or proceeding by a governmental
unit or any organization exercising authority under the Convention on the Prohibition
of the Development, Production, Stockpiling and Use of Chemical Weapons and on
Their Destruction, opened for signature on January 13, 1993, to enforce such
governmental unit’s or organization’s police and regulatory power, including the
enforcement of a judgment other than a money judgment, obtained in an action or
proceeding by the governmental unit to enforce such governmental unit’s or
organization’s police or regulatory power[.]
11 U.S.C. § 362(b)(4).
The inclusion of the language relating to chemical weapons and their destruction seems a bit
odd because the statute can arguably be read as applying only to governmental units exercising their
authority under the convention. In fact, at least one court appears to have read the language that
way. See, In re Finley, 237 B.R. 890, 894 (Bankr. N.D. Miss. 1999) (stating that 11 U.S.C. §
362(b)(4), as amended, “is applicable to governmental units or any organizations exercising
authority under the Convention[,] . . . which would not include the Mississippi Department of Public
Safety under the factual circumstances of this proceeding”).
However, it has been cogently explained – based upon the statute’s legislative history – that
when Congress amended § 362(b) in 1998, it combined former subsections (b)(4) and (b)(5) into a
single new subsection – § 362(b)(4) – and intended to expand the scope of the statute, not curtail it.
United States v. Federal Resources Corp., 525 B.R. 759, 763-64 (D. Idaho 2015). In fact, “[w]ithout
referring to the legislative history surrounding the 1998 amendment, circuit court of appeals have
continued to analyze the § 362(b)(4) police or regulatory powers exception in exactly the same
manner as before.” Id. at 764-65 (collecting cases); see also United States ex rel. Fullington v.
Parkway Hosp., 351 B.R. 280, 290 (E.D.N.Y. 2006) (“Apart from actions brought by a
‘governmental unit,’ § 362(b)(4) also applies to actions brought by an action or proceedings
commenced by an organization exercising authority under the Convention[.]”); In re PMI-DVW
Real Estate Holdings, L.L.P., 240 B.R. 24, 30 (Bankr. D. Ariz. 1999) (“[T]he Court finds and
concludes that Congress did not amend the statute in such a way to only include enforcement of
violations of the Convention . . . as the only police or regulatory power exception to the automatic
stay[.]”); In re Mohawk Greenfield Motel Corp., 239 B.R. 1, 6 (Bankr. D. Mass. 1999) (observing
that “commentators agree that given the lack of significant departure from the former Code sections,
the case law that developed under former § 362(b)(4) and (5) remains as viable guidance in
interpreting this new provision”).
For its part, the Sixth Circuit appears to have addressed Section 362(b)(4) on three occasions
since the amendment, see In re Leonard, 644 F. App’x 612 (6th Cir. 2016), Chao v. Hosp. Staffing
Servs., Inc., 270 F.3d 374 (6th Cir. 2001), and Associated Gen. Contractors of Ohio, Inc. v. Drabik,
250 F.3d 482 (6th Cir. 2001), but in none of those cases suggested that the exception was limited to
claims brought under the Convention. Quite the contrary, the court in each of those cases referred
to Section 362(b)(4) as the “police and regulatory power” exception to the automatic stay provision.
See Leonard, 644 F. App’x at 615; Chao, 270 F.3d at 385; Drabik, 250 F.3d at 285 n.5. Thus, the
Court considers the police or regulatory power exception to the automatic stay provision, without
limiting it to actions under the convention.
“[T]o determine whether an action qualifies as a proceeding pursuant to a governmental
unit’s police or regulatory power, and therefore falls outside the ambit of the automatic stay,” a court
is to “appl[y] two tests: the pecuniary purpose test and the public policy test.” Chao, 270 F.3d at
385. As the Sixth Circuit in Chao explained:
Under the pecuniary purpose test, reviewing courts focus on whether the
governmental proceeding relates primarily to the protection of the government's
pecuniary interest in the debtor's property, and not to matters of public safety. Those
proceedings which relate primarily to matters of public safety are excepted from the
stay. Under the public policy test, reviewing courts must distinguish between
proceedings that adjudicate private rights and those that effectuate public policy.
Those proceedings that effectuate a public policy are excepted from the stay.
Id. at 385-86.
Although the Sixth Circuit appears to have yet addressed the issue, “[i]t is well settled that
actions brought under the False Claims Act fall squarely within the § 362(b)(4) exception to the
stay,” In re McOuat, 2016 WL 5947229, at *2 (Bankr. E.D.N.C. Oct. 13, 2016), at least insofar as
the action is brought by the government and not by a private citizen as a qui tam action in which the
government has chosen not to intervene, United States ex rel. Kolbeck v. Point Blank Solutions, Inc.,
44 B.R. 336, 341-42 (E.D. Va. 2011). The Eighth Circuit has explained:
[C]ivil actions by the government to enforce the FCA serve to inflict the “sting of
punishment” on wrongdoers and, more importantly, deter fraud against the
government, which Congress has recognized as a severe, pervasive, and expanding
national problem. The police and regulatory interests furthered by enforcement of the
FCA are undeniably legitimate and substantial. The fact that the statute’s chief
purpose is to make the government whole does not reduce the weight of these
interests so as to make their vindication insufficient to qualify for the § 362(b)(4)
exception from the automatic stay.
In re Commonwealth Companies, Inc., 913 F.2d 518, 526 (8th Cir. 1990); see also, In re Universal
Life Church, Inc., 128 F.3d 1294, 1298 (9th Cir. 1997) (citing In re Commonwealth Companies for
the proposition that “a civil suit brought pursuant to the Federal False Claims Act is sufficient to
satisfy the section 362(b)(4) exception”).
Given the clear majority view, the Court finds that Plaintiffs’ Complaint falls within the
Section 362(b)(4) exception to the automatic stay. The Court also finds that the Complaint meets
the tests set forth in Chao.
The inquiry under the “pecuniary interest” test is “whether the enforcement would result in
a pecuniary advantage to the government vis-a-vis other creditors of the bankruptcy case.” Chao,
270 F.3d at 388 n.9. That does not appear to be the case here because, not only are Plaintiffs not
attempting to enforce a judgment, they are general unsecured creditors who, if they prevail, will
remain in that capacity. The Complaint merely seeks to liquidate their claims. As such, success of
the suit would not result in a pecuniary advantage to the government to the detriment of other
creditors. In re Commonwealth Companies, 913 F.2d at 524 (“The entry of judgment [on the
government’s False Claims Act complaint] would simply fix the amount of the government’s
unsecured claim against the debtors. It would not convert the government into a secured creditor,
force the payment of a prepetition debt, or otherwise give the government a pecuniary advantage
over other creditors of the debtors’ estate.”).
As for the “public policy” test, because “[a]ll acts of Congress by definition declare national
policy, and lawsuits to enforce those acts necessarily effectuate the public policy of the United
States,” courts must “analyze whether a particular lawsuit is undertaken by a governmental entity
in order to effectuate public policy or, instead, to adjudicate private rights.” Id. at 389. By this suit,
Plaintiffs seek to deter fraudulent billing and the submission of fraudulent documents for payment,
which falls within “‘[t]he purpose of the FCA – policing the integrity of the government’s dealings
with those to whom it pays money.’” United States ex rel. Am. Sys. Consulting, Inc. v. ManTech
Advanced Sys. Int’l, 600 F. App’x 969, 977 (6th Cir. 2015) (citation omitted). Furthermore, through
this action, Plaintiffs do not seek to adjudicate any private rights.
In determining that the exception to the automatic stay applies, the Court has considered
Defendants arguments to the contrary, but find them unpersuasive.
First, Defendants argue that, “[b]y filing the Stay Relief Motion in this Court, Plaintiffs have
violated the Standing Order of Reference, and contravened the statutory framework imposed by 28
U.S.C. § 157.” (Docket No. 9 at 8). Relatedly, Defendants argue that Plaintiffs have not complied
with either the federal or local bankruptcy procedural requirements for stay motions.
Even though there is a standing order of reference in this district in accordance with 28
U.S.C. 157(a), this court is vested with original and exclusive jurisdiction over all bankruptcy cases
and original and concurrent jurisdiction over all civil proceedings arising under the Bankruptcy
Code. 28 U.S.C. § 1334(a), (b). With regard to such jurisdiction in the context of the automatic stay
provision and exceptions thereto, the Sixth Circuit in Chao observed:
Once a bankruptcy proceeding begins in one court, the concurrent jurisdiction of
other courts is partially stripped. . . . In addition to exclusive jurisdiction over the
bankruptcy proceeding itself, “[t]he district court in which a case under title 11 is
commenced or is pending shall have exclusive jurisdiction of all of the property,
wherever located, of the debtor as of the commencement of such case, and of
property of the estate.” . . . However, the exclusivity of the bankruptcy court’s
jurisdiction reaches only as far as the automatic stay provisions of 11 U.S.C. § 362.
That is, if the automatic stay applies to an action directed at the debtor or its
property, jurisdiction is exclusive in the bankruptcy court. If the automatic stay does
not apply e.g., if an exception to the stay covers the action in question the bankruptcy
court's jurisdiction is concurrent with that of any other court of competent
270 F.3d at 383-84.
As to which court can make the determination, “the court in which the judicial proceeding
is pending . . . has jurisdiction to decide whether the proceeding is subject to the stay.” Dominic's
Rest. of Dayton, Inc. v. Mantia, 683 F.3d 757, 760 (6th Cir. 2012). Even more specifically, “‘[t]he
court in which the litigation claimed to be stayed is pending has jurisdiction to determine not only its own
jurisdiction but also the more precise question whether the proceeding pending before it is subject to the
automatic stay.’” N.L.R.B. v. Edward Cooper Painting, Inc., 804 F.2d 934, 939 (6th Cir. 1986) (quoting
In re Baldwin-United Corp. Litigation, 765 F.2d 343, 347 (2nd Cir.1985)); see In re WinPar Hosp.
Chattanooga, LLC, 401 B.R. 289, 294 (Bankr. E.D. Tenn. 2009) (stating that “if the automatic stay
applies to an action directed at the debtor or its property, jurisdiction is exclusive in the bankruptcy
court,” but “[i]f the automatic stay does not apply ‘e.g., if an exception to the stay covers the action in
question’ the bankruptcy court’s jurisdiction is concurrent with that of any other court of competent
jurisdiction”); Singleton v. Fifth Third Bank of Western Ohio, 230 B.R. 533, 538-39 (6th Cir. B.A.P.
1999) (“That the bankruptcy court may be the exclusive forum to consider a motion for relief from
the automatic stay does not preclude a nonbankruptcy court from determining whether a matter
pending before it is stayed by a party's bankruptcy filing.”).
Because this Court has jurisdiction to determine whether the present action is exempt from
the stay, Defendants’ complaint about Plaintiffs’ failure to follow the Bankruptcy Rules and the
Middle District Bankruptcy Court’s Local Rules fails. Besides, the linchpin of Defendants’
arguments on this score is Bankruptcy Rule 4001(a), which deals with relief from the automatic stay
and requires that a motion be made in accordance with Rule 9014. However, the request for relief
from a stay and an exception to the automatic stay are two different things. As one court observed
in relation to a motion filed by a state bar regarding disciplinary proceedings against a debtorattorney:
The Bar’s request for relief from the stay was a contested matter that was properly
commenced by a motion. Bankruptcy Rules 4001(a) and 9014. The fact that the Bar
alternatively contended that the stay did not apply did not change this into an
adversary proceeding. Bankruptcy courts regularly hear motions for relief from the
stay where a party contends in the alternative that the stay does not apply, but that
if it does it should be lifted. The policies favoring expedited relief apply equally to
such alternative motions as to motions which request only that the stay be lifted.
Framing the request for relief in such a manner, therefore, should not convert the
dispute into one that should be determined in an adversary proceeding.
In re Wade, 115 B.R. 222, 230 (B.A.P. 9th Cir. 1990).
Second, Defendants rely on In re Wellham, 53 B.R. 195 (Bankr. M.D. Tenn. 1985), which
they characterize as “being a case directly on point in the Middle District of Tennessee.” (Docket
No. 9 at 8). There, the Bankruptcy Court found that the action did not fall within the 362(b)(4)
exception, but it did so in considering an entirely different complaint.
In In re Wellham “only one count of the seventeen-count complaint deal[t] with the false
claims act while the remaining counts s[ought] damages under a variety of common law ground.”
Id. at 198. As a consequence, the bankruptcy court found that the action could not “properly be
characterized as an enforcement of police or regulatory powers” under either the pecuniary purpose
or public policy test, and stated that it was “not convinced that” enforcing the False Claims Act was
“the Government’s primary motivation.” Id. Here, in contrast, while the last two counts of the fivecount complaint allege payment by mistake and unjust enrichment, the first two counts allege
violation of the False Claims Act and the third alleges violations of the Tennessee Medicaid False
Claims Act, Tenn. Code Ann. § 71-5-182(a)(1)(B). See In re McOuat, 2016 WL 5947229, at *3
(Bankr. E.D.N.C. Oct. 13, 2016) (stating that “[t]his court is satisfied that the facts of this case fit
well-settled case law: the United States’ first three claims, all under the False Claims Act, fall within
the § 362(b)(4) exception to the automatic stay,” notwithstanding the fact that the government also
filed “common law fraud claims, including unjust enrichment and payment by mistake of fact”).
Further, in In re Wellham, the debtor was barred from continuing as a supplier to the
government and was not doing so at the time the government’s motion was filed. Here, most of the
reorganizing Defendants are still in business and, according to Plaintiffs, all “except Crestview
intend to remain Medicare, Medicaid and TennCare providers.” (Docket No. 2 at 6).
Moreover, the few cases like In re Wellham that can be read as finding that a False Claims
Act case brought by the Government does not fall within the Section 362(b)(4) exception because
of the damages component of such claims have subsequently been characterized as being based upon
a “flawed analysis.” In re Commonwealth Companies, 913 F.2d at 527 n.12. That may be a bit
harsh, but the fact remains that part of the bite of a False Claims Act case is that the wrongdoer will
be forced to pony-up money. “Indeed, most government actions which fall under this exemption
have some pecuniary component, particularly those associated with fraud detection.” In re Universal
Life Church, Inc., 128 F.3d 1294, 1299 (9th Cir. 1997). But, “[t]his does not abrogate their police
power function” and “[o]nly if the action is pursued ‘solely to advance a pecuniary interest of the
governmental unit will the automatic stay bar it.’” Id. (citation omitted); see Safety-Kleen, Inc.
(Pinewood) v. Wyche, 274 F.3d 846, 865 (4th Cir. 2001) (“The fact that one purpose of the law is
to protect the state’s pecuniary interest does not necessarily mean that the exception is
In re Commonwealth Companies, 913 F.2d at 525 (“The FCA is certainly a fraud law. . . It seems
inescapable then that a governmental action attempting to fix damages for violation of the FCA
comes within § 362(b)(4)”); EEOC v. CTI Glob. Sols., Inc., 422 B.R. 49, 52-33 (D. Md. 2010)
(finding that because the court was “persuaded that Plaintiff’s primary purpose in bringing this Title
VII action is to protect the public welfare . . . the fact that a secondary, pecuniary interest may be
involved does not bring the case outside of the § 362(b)(4) exemption”).
For the foregoing reasons, Plaintiffs’ “Joint Motion for an Order That Their Pending False
Claims Act Civil Action is Legally Excepted From the Automatic Stay in Bankruptcy” (Docket No.
2) will be granted. Defendants’ unopposed “Motion to Stay Response to Plaintiffs’ Complaint”
(Docket No. 10) will also be granted.
An appropriate Order will enter.
KEVIN H. SHARP
UNITED STATES DISTRICT JUDGE
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