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In re Bloomfield Nursing Operations, LLC

United States District Court, N.D. Texas, Fort Worth Division

September 26, 2019

BLOOMFIELD NURSING OPERATIONS, LLC, et al., Appellees. THE STATE OF NEW MEXICO, ex rel. Hector H. Balderas, Attorney Genral, Appellant,



         Appellant the State of New Mexico (the “State”) appeals the Order Denying State of New Mexico’s Motion for Order Confirming Automatic Stay Inapplicable to Medicaid Fraud Enforcement Action (Bankruptcy Docket No. 171), signed May 1, 2018, issued by the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division (“Bankruptcy Court”). Having considered the briefing, the record, the applicable law, and for the reasons stated below, the Court REVERSES the Bankruptcy Court’s ruling of May 1, 2018.

         I. Background

         Prior to summarizing the proceedings before the Bankruptcy Court, the Court sets forth the background facts concerning the State’s enforcement action against the Bloomfield Debtors, [1] the Preferred Care Debtors, [2] and the Management Debtors[3] (collectively, the “Debtors”).

         A. The New Mexico AG Suit

         The Bloomfield Debtors operated and managed skilled nursing facilities in New Mexico from April 1, 2007 until October 31, 2012. R. 8, 189. On October 31, 2012, Preferred Care, Inc. purchased the leasehold interests and all assets used in connection with operating the facilities. Id.

         In December of 2014, the State filed a lawsuit (the “New Mexico AG Suit”) in the First Judicial District Court of Santa Fe County (the “New Mexico State Court”) against numerous defendants.[4] Id. at 19. The State’s enforcement action seeks, inter alia, treble damages and civil penalties for false claims submitted to the Medical Assistance Program (“Medicaid”), under New Mexico’s Fraud Against Taxpayers Act (“FATA”)[5] and Medicaid Fraud Act, [6] as well as civil penalties, restitution, and injunctive relief for misrepresentations to consumers and unconscionable trade practices, under the state Unfair Practices Act.[7] Appellant’s Br. 3–4

         The State alleges that the Debtors chronically understaffed their nursing facilities, thereby failing to deliver the basic care services they were paid to provide. Id. at 4. Specifically, the State alleges that the Debtors were paid thousands of dollars per month for each resident’s care, while the “elderly and vulnerable citizens were left lying in their own feces and urine for hours at a time, suffered pressure sores, did not get enough assistance to eat and drink at mealtimes, and were not bathed or groomed properly.”[8] Id.

         To support its understaffing theory, the State uses a “widely-accepted industrial engineering simulation” that calculates the time and manpower needed to perform daily care tasks in a hypothetical setting. R. 191. The State contends that when it ran the Debtors’ staffing and resident information through the simulation, the results showed that it would have been physically and mathematically impossible for the Debtors to have provided the required level of care to their residents.[9] Id.

         B. The Bankruptcy Court’s Hearing

         As of result of the New Mexico AG Suit and other lawsuits, the Bloomfield Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. R. 8. Following this bankruptcy filing, the New Mexico State Court entered an order staying the entire New Mexico AG Suit pursuant to 11 U.S.C. § 362(a). Id. The State then filed a motion seeking an order from the Bankruptcy Court confirming that the State’s enforcement action against the Bloomfield Debtors was not subject to the automatic stay, pursuant to 11 U.S.C. § 362(b)(4)-the police and regulatory power exception to the automatic stay. Id. at 11.

         The Bankruptcy Court denied the State’s motion. In doing so, the Bankruptcy Court noted that the State was only seeking one form of non-monetary relief: injunctive relief as a remedy for alleged violations of the Unfair Practices Act. Id. at 10. The Bankruptcy Court also stated that it was unconvinced of the State’s given public policy reasons for pursuing the New Mexico AG Suit. Id. at 13. Applying the relevant Fifth Circuit case law, the Bankruptcy Court concluded that the State failed to carry its burden to satisfy the requisite tests to be allowed an exception under § 362(b)(4). Id. at 14.

         II. Standard of Review

         A district court sits as an appellate court when reviewing a bankruptcy court’s decision in a “core proceeding.” In re Renaissance Hosp. Grand Prairie, Inc., 713 F.3d 285, 293 (5th Cir. 2013) (citing In re Webb, 954 F.2d 1102, 1103–04 (5th Cir. 1992)). This appeal is from a final order of the Bankruptcy Court in a core proceeding. Thus, the Court has jurisdiction over the appeal of the Bankruptcy Court’s order pursuant to 28 U.S.C. § 158(a)(1). The district court reviews the bankruptcy court’s legal conclusions de novo. Renaissance, 713 F.3d at 294 (citing In re Gerhardt, 348 F.3d 89, 91 (5th Cir. 2003)). “Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.” Fed.R.Bankr.P. 8013. A finding of fact is clearly erroneous only if the district court is left with “the definite and firm conviction that a mistake has been committed.” In re Perry, 345 F.3d at 308–09 (citing In re Dennis, 330 F.3d 696, 701 (5th Cir. 2003)). In reviewing the facts, the Court must give due regard to the opportunity of the bankruptcy judge to assess the credibility of the witnesses. Dennis, 330 F.3d at 701. Ultimately, the bankruptcy court has “great latitude” when conducting a bench trial. See In re Corland Corp., 967 F.2d 1069, 1074 (5th Cir. 1992) (citing Cranberg v. Consumers Union of U.S., Inc., 756 F.2d 382, 392 (5th Cir. 1985)).

         III. Analysis

         When a party declares a Chapter 11 bankruptcy, normally, an automatic stay is imposed on any other pending or future actions against the party. Under the Bankruptcy Code,

[e]xcept as provided in subsection (b) of this section, a petition filed under section 301, 302 or 303 of this title…operates as a stay, applicable to all entities, of the commencement or continuation, including the issuance or employment of process, 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 under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title[.]

11 U.S.C. § 362(a). “The purpose of the automatic stay is to give the debtor a ‘breathing spell’ from his creditors, and also, to protect creditors by preventing a race for the debtor’s assets.” Matter of Commonwealth Oil Ref. Co., Inc., 805 F.2d 1175, 1182 (5th Cir. 1986) (citing H.R. Rep. No. 595, 95th Cong., 1st Sess. 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5964, 6296–97; seealso Reliant Energy Servs., Inc. v. Enron Canada Corp., 349 F.3d 816, 825 (5th Cir. 2003) (“The purposes of the bankruptcy stay under 11 U.S.C. § 362 are to protect the ...

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