United States District Court, N.D. Texas, Fort Worth Division
MEMORANDUM OPINION AND ORDER
O'CONNOR, UNITED STATES DISTRICT JUDGE.
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.
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,  the Preferred Care Debtors,  and the
Management Debtors (collectively, the “Debtors”).
New Mexico AG Suit
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.
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. 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”) and Medicaid Fraud Act,  as well as civil
penalties, restitution, and injunctive relief for
misrepresentations to consumers and unconscionable trade
practices, under the state Unfair Practices
Appellant’s Br. 3–4
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
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
Bankruptcy Court’s Hearing
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.
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.
Standard of Review
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)).
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
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