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In re THG Holdings LLC

United States District Court, D. Delaware

December 5, 2019

IN RE THG HOLDINGS LLC, et ai, Debtors.
v.
TRUE HEALTH DIAGNOSTICS, LLC, Appellee. ALEX M. AZARII, 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, Appellants,

          MEMORANDUM ORDER

         Before the Court is the Emergency Motion for Stay Pending Appeal (D.I. 1) ("Emergency Motion") filed by appellant, the United States, on behalf of Alex M. Azar, II, Secretary of the United States Department of Health and Human Services, and Seema Verma, Administrator for the Centers for Medicare and Medicaid Services (together "CMS"), and the Defense Health Agency ("DHA") of the U.S. Department of Defense (together with CMS, the "Government"), seeking a stay pending appeal of the Bankruptcy Court's November 27, 2019 order approving the above-captioned Debtors' disclosure statement and confirming the Debtors' proposed chapter 11 plan of liquidation (B.D.I. 531)[1] (the "Confirmation Order"). The Debtors have filed an opposition to the Emergency Motion (D.I. 6), and the administrative agent under the Debtors' post-petition financing agreement[2] has filed a joinder to the Debtors' opposition (D.I. 7). 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. For the reasons set forth below, the Emergency Motion is denied.

         1. Background.

         On July 30, 2019 (the "Petition Date"), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. On the Petition Date, debtor True Health Diagnostics, LLC ("THD") filed a complaint and a motion for preliminary injunction against the Government to enforce the automatic stay and enjoin the Government from withholding Medicare payments owed to THD in bankruptcy. (See Adv. D.I. 1, 3, 4). The parties fully briefed the motion for preliminary injunction and, on August 22, 2019, the Bankruptcy Court held a preliminary injunction hearing. (Adv. D.I. 21, 22).

         2. On August 29, 2019, the Bankruptcy Court issued a memorandum opinion granting THD's motion for preliminary injunction and entered the Payment Order. In re THG Holdings LLC, 604 B.R. 154 (Bankr. D. Del. 2019). The Bankruptcy Court rejected the Government's argument that the Bankruptcy Court lacked jurisdiction to enforce the automatic stay and enjoin the Government from continuing to withhold Medicare payments during the bankruptcy because THD had not exhausted its administrative remedies under the Medicare statute. See Id. at 158-59. The Bankruptcy Court also held that THD's right to receive Medicare payments was "indisputably" property of its bankruptcy estate under 11 U.S.C. § 541(a), and the Government's withholding of such payments after THD's bankruptcy filing was a violation of the automatic stay under 11 U.S.C. § 362(a). See Id. at 160. The Bankruptcy Court rejected the Government's contention that withholding Medicare payments to THD fit within the narrow police power exception to the automatic stay under 11 U.S.C. § 362(b)(4). See Id. at 161. The Bankruptcy Court entered an order requiring that "to the extent not already remitted to True Health, [the Government] shall, within five (5) business days of entry of this Order Enforcing the Automatic Stay, deliver to True Health one hundred percent (100%) of all funds Defendants have withheld from True Health on and after the Petition Date." (Adv. D.I. 28 (referred herein as the "Ordered Payments")).

         3. Two weeks after the entry of the Payment Order, the Government sought a stay pending appeal of the Payment Order in the Bankruptcy Court. (See Adv. D.I. 33). The Bankruptcy Court denied the Government's request for a stay pending appeal, finding that the Government "ha[s] not established a likelihood of success on the merits given the Third Circuit's opinion in University Medical Center}[3] that is binding precedent" and finding no irreparable harm to the Government in denying the motion, recognizing that "[t]hey will still have all of the remedies that they have as a creditor in a bankruptcy case." (Adv. D.I. 270, 9/20/19 Hr'g Tr. at 38:23-39:13).

         4. Thereafter, the Government sought a stay pending appeal of the Payment Order in this Court. This Court agreed with the Bankruptcy Court that the Government failed to demonstrate a likelihood of success on appeal to warrant a stay and failed to establish any irreparable harm to the Government in the absence of a stay. (See Azar v. True Health Diagnostics, LLC, Civ. No. 19-1714-RGA, D.I. 31, 10/16/19 Hr'g Tr. at 38:13-18).

         5. Thereafter, 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 appointed by the Office of the United States Trustee to formulate terms of a liquidating chapter 11 plan. (B.D.I. 508). 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 with 94.74% in number and 94.45% in amount voting to accept the Plan. (See id.)

         6. On November 26, 2019, the Bankruptcy Court held a hearing (the "Confirmation Hearing") to consider the final approval of the Debtors' disclosure statement and final confirmation of portions of the Plan to which the Government had objected.

         7. 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.)

         8. 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, 11/26/19 Hr'g Tr. 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.

         9. The stay of the Confirmation Order by various Federal Rules of Bankruptcy Procedure was partially waived and set to expire on December 4, 2019 at 11:59 p.m. (Prevailing Eastern Time). (B.D.I. 531 at ¶ 43). Upon the Government's request for a hearing date on a motion for stay pending appeal, the Bankruptcy Court stated that it would deny any such motion without a hearing, thus rendering impractical the filing of any request for stay pending appeal relief in that court. (See D.I. 6-2, 11/26/19 Hr'g Tr. at 82:13-83:1). On December 1, 2019, the Government filed its Notice of Appeal (D.I. 2) with respect to the Confirmation Order together with the Emergency Motion (D.I. 1). The Court set an answering deadline of December 3, 2019 (D.I. 4) with respect to the Emergency Motion, and extended the stay contained in the Confirmation Order for an additional 24 hours to December 5, 2019 at 11:59 p.m. (Prevailing Eastern Time) (D.I. 8).

         10. Jurisdiction.

         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 Plan Confirmation Order is a final order.

         11. Discussion.

         "The granting of a motion for stay pending appeal is discretionary with the court." In re Trans World Airlines, Inc., 2001 WL 1820325, at *2-3 (Bankr. D. Del. Mar. 27, 2001). The Government bears the burden of proving that a stay of the Confirmation Order is warranted based on the following criteria: (1) whether the movant has made "a strong showing" that it is likely to succeed on the merits; (2) whether the movant will be irreparably injured absent a stay; (3) whether a stay will substantially injure other interested parties; and (4) where the public interest lies. Republic of Philippines v. Westinghouse Electric Corp., 949 F.2d 653, 658 (3d Cir. 1991). The most critical factors, according to the Supreme Court, are the first two: whether the stay movant has demonstrated (1) a strong showing of the likelihood of success, and (2) that it will suffer irreparable harm - the latter referring to harm that ...


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