First Circuit Rules on Applicability of Automatic Stay to Government Action in Bankruptcy

December 14, 2016

The First Circuit Court of Appeals recently ruled that the federal government was able to terminate a bankrupt’s Medicare/Medicaid Provider Agreement without violating the automatic stay, rendering an important decision on the intersection of bankruptcy and Medicare law.

On June 15, 2015 Parkview sent the Center for Medicare & Medicaid Services (CMS) a letter stating its intent to end participation in Medicare, and that it would be closing its hospital but continuing to provide outpatient services.  Parkview filed for Chapter 11 bankruptcy on June 16, 2015.  CMS responded on June 19, 2015 that it would terminate Parkview’s Provider Agreement, effective June 18, 2015, because Parkview no longer qualified as a Medicare participating hospital. Parkview alleged that CMS’ termination was a violation of the automatic stay provided for in Section 362 of the Bankruptcy Code, which broadly protects debtors in bankruptcy from actions to collect on or enforce obligations.

The provisions of the automatic stay provide an exception for the exercise of government “police powers”. The Court concluded that CMS’ actions were a valid exercise of police and regulatory powers that fell outside of the protections of the automatic stay.  CMS had a strong public policy interest in enforcing the standards for participation in Medicare.  Secondly, the termination of the Provider Agreement did not have a monetary, or pecuniary, motive.  The government was not seeking to recover a debt nor did it demand any payment.  In ruling that the government’s actions were outside the scope of the automatic stay, the First Circuit avoided having to address a further dispute which has caused conflict among the courts – whether decisions made under the Medicare statute (42 U.S.C. s. 405) are subject to bankruptcy jurisdiction.

The decision provides further guidance on steps that governmental agencies may take during a bankruptcy case, without first seeking Bankruptcy Court authorization and without running afoul of the automatic stay, when acting in furtherance of police or regulatory powers.

The case is Parkview Adventist Medical Center v. United States, 1st Cir. Appeal No. 16-1731 (November 29, 2016).