In re Bayou Shores SNF, LLC, 525 B.R. 160

Background

Debtor operates a 159‑bed skilled nursing facility in Florida serving 109 patients, most with severe psychiatric conditions; >90% of revenue comes from Medicare/Medicaid.
CMS cited the facility for three deficiencies (Feb–July 2014), each characterized as immediate jeopardy; Debtor implemented corrective measures and retained a compliance consultant.
CMS issued notice terminating the Debtor’s Medicare provider agreement effective August 8, 2014; Debtor appealed and sought a temporary injunction in district court, which was dissolved for lack of jurisdiction after administrative remedies were not exhausted.
Debtor filed Chapter 11 hours after the district court dissolved the TRO; bankruptcy court enjoined termination pending completion of administrative appeal and Debtor proposed a plan funded by ongoing operations that all creditors supported.
HHS/CMS argued plan infeasible because the Medicare (and, by operation, Medicaid) provider agreements had been terminated prepetition; AHCA (Florida) indicated it intended to deny renewal or revoke the state license based on the deficiencies.
Bankruptcy court found the Medicare agreement not effectively terminated prepetition (appeal process unresolved), allowed assumption under 11 U.S.C. § 365, rejected HHS jurisdictional objections under 42 U.S.C. § 405(h), and held the plan feasible despite AHCA’s stated intent.

Issues

Issue	Debtor's Argument	HHS/AHCA's Argument	Held
Whether bankruptcy court has jurisdiction to decide assumption of Medicare provider agreement	§ 1334 grants bankruptcy jurisdiction; court may decide issues "related to" the Chapter 11 case	42 U.S.C. § 405(h) bars federal court review of Medicare matters pre‑administrative exhaustion	Court exercised § 1334 jurisdiction; § 405(h) does not bar bankruptcy jurisdiction here
Whether the Medicare provider agreement was terminated prepetition so it cannot be assumed under § 365	Termination was not final because administrative appeals remained pending; therefore contract could be assumed	Termination notice dated prepetition made the agreement terminated and thus not assumable	Agreement not terminated for § 365 purposes because termination was reversible pending appeal; therefore assumable
Whether Debtor satisfied § 365(b) (cure and adequate assurance) to assume the provider agreement	Debtor cured deficiencies, presented consultant and ombudsman reports, and provided adequate assurances of future performance	HHS implicitly argued providers have no cure right or that § 365 should not apply to Medicare agreements; offered no evidence contesting Debtor’s cure/assurances	Court found Debtor met § 365 requirements based on unrefuted evidence and ongoing oversight
Whether plan is feasible given AHCA’s intention to deny renewal/revoke license	Plan is feasible; AHCA’s action is uncertain, AHCA has mitigated rights under Florida law and must consider mitigating factors; immediate denial would displace vulnerable patients	AHCA asserted it may deny renewal or revoke license (police/regulatory action not stayed) and that prior deficiencies require revocation	Court concluded plan feasible: AHCA collaterally estopped from relying on Medicare termination; revocation uncertain and mitigation factors weigh against treating license risk as fatal to feasibility

Key Cases Cited

In re University Med. Center, 973 F.2d 1065 (3d Cir. 1992) (Medicare provider agreements treated like other executory contracts and subject to § 365)
First Am. Health Care of Georgia, Inc. v. HHS, 208 B.R. 985 (Bankr. S.D. Ga. 1996) (bankruptcy courts may exercise § 1334 jurisdiction over some Medicare disputes)
Miller v. Kemira (In re Lemco Gypsum, Inc.), 910 F.2d 784 (11th Cir. 1990) (definition of "related to" jurisdiction in bankruptcy)
Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (U.S. 2001) (do not consult legislative history when statutory text is unambiguous)
In re Fontainebleau Hotel Corp., 515 F.2d 913 (5th Cir. 1975) (termination must be complete to cut off § 365 rights)