Bankruptcy Update Blog

Unqualified CARES Act Funds Can't Be Used To Pay Creditors

U.S. Bankruptcy Judge Craig A. Gargotta rejected a debtor’s attempt to use CARES Act funds, which it did not actually qualify for, to pay creditors in its chapter 11 case. 

BR Healthcare Solutions (the “Debtor”) operated a nursing home under the name Karnes City Health & Rehabilitation Center near San Antonio.  But in January of 2020, the Debtor’s principal “decided to close the nursing home [] due a sustained period of net operating losses.  By February 4, 2020, all of the remaining patients were transitioned out of the nursing home to other providers.”[1]  In March of 2020, the Debtor filed for chapter 11. 

On April 6, 2020, the Center for Medicare and Medicaid Services (“CMS”) sent the Debtor a letter stating that CMS “has been notified that your Skilled Nursing Facility (SNF) voluntarily withdrew from the Medicare program on February 3, 2020.  As a result, the provider number shown above has been canceled effective February 3, 2020.”

Nevertheless, and despite CMS’s letter, in April and May of 2020, the U.S. Department of Health and Human Services (“HHS”), of which CMS is a part, deposited $238,445.41 in three installments into the Debtor’s debtor-in-possession bank account, of which $234,255.32 remained.  The money was distributed pursuant to the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act.

On April 30, 2020, the Debtor’s principal filed two attestations with HHS certifying compliance with the Terms and Conditions of the disbursements.  Those terms included that “[t]he Recipient certifies that it provides or provided after January 31, 2020 diagnoses, testing, or care for individuals with possible or actual cases of COVID-19 [and] is not currently terminated from participation in Medicare . . . .” 

Agreeing with HHS, Judge Gargotta reasoned that because “certifies” is a present-tense verb, at the time of the attestation, the Debtor could not be eligible for the funds if it was “currently terminated.”[2]  While Judge Gargotta cited the much-debated Chevron doctrine of deference to administrative interpretations, he also found the plain meaning of the text supported HHS’s position.  As Judge Gargotta put it, “[a] plain reading of the HHS Terms and Conditions shows that [a] skilled nursing facility such as Debtor must have been enrolled in the Medicare program, which Debtor was by its own admission not.”  Accordingly, Judge Gargotta denied the Debtor’s motion to authorize the use of CARES Act funds to pay its creditors, and ordered the Debtor to return the funds to HHS.

In a decision approaching the issue from the opposite direction, In re Roman Catholic Church of Archdiocese of Santa Fe,[3] U.S. Bankruptcy Judge David T. Thuma found that the Small Business Administration (“SBA”) exceeded its authority under the CARES Act in excluding bankruptcy debtors from eligibility for loans, and that the SBA’s decision was arbitrary and capricious.  Unlike the Debtor discussed above, however, the Roman Catholic Church of Santa Fe continued operations. 

The varying results make equitable sense but do raise additional questions.  Namely, what would have happened to HHS’s money had the Debtor simply ceased operations and not filed for bankruptcy due to other outstanding debt?  Under HHS and the Court’s interpretation of the CARES Act, the Debtor was never entitled to the money and was required to return it.  But one has to wonder, would HHS have realized that it deposited more than $200,000 in the Debtor’s accounts, even though CMS had already canceled the Debtor’s provider number, absent the bankruptcy proceeding? 


[1] In Re: BR Healthcare Solutions, LLC f/d/b/a Karnes City Health & Rehabilitation Center, Debtor, No. 20-50627-CAG, 2021 WL 4597761, at *4 (Bankr. W.D. Tex. Oct. 5, 2021) (brackets omitted).

[2] Id. at *5.

[3] 615 B.R. 644 (Bankr. D.N.M. 2020)