THG Holdings LLC – DHHS Objects to Plan that Requires it to Pay Debtors $27mn in Respect of Debtors’ Allegedly Fraudulent Medicare Bills

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November 18, 2019 – The Department of Health and Human Services (“DHHS”) objected [Docket No. 482] to the Debtors' combined Disclosure Statement and Joint Chapter 11 Plan of Liquidation [Docket No. 482] citing the Plan's failure to protect the DHHS's right to recover amounts that it has been obligated to pay the Debtors' further to Chapter 11's automatic stay provisions. The DHHS claims that it has been fraudulently over-billed by Debtors to the tune of $27.0mn in respect of Medicare Part B payments and has a right to withhold payments to the Debtors in respect of fraudulent invoicing. Following a Court order stating that those payments were part of the Debtors' estates, DHHS handed over more than $5.0mn of the disputed payments; the balance it has continued to hold back, arguably in violation of the Court's order, via a pre-petition "fraud suspension." The DHHS further argues that the Plan, as proposed, "impermissibly interferes with the Government’s police and regulatory powers to prosecute fraud claims and criminal actions."

The objection states, “The Plan should not be confirmed because it does not meaningfully preserve the United States’ right to recover the more than $5 million it has paid under the Court’s Order Enforcing the Automatic Stay…The Plan does not contain a separate reserve for amounts paid under the Order. Nor does it provide details showing that sufficient funds would be available for this purpose. Thus, if an appellate court concludes that the United States did not violate the automatic stay by leaving a pre-petition fraud suspension in place, and orders True Health Diagnostics, LLC (True Health or THD) or the proposed liquidating trustee to return payments made under the Order, how would THD or any liquidating trustee provide this refund? And how does such a possibility effect the confirmability and/or consummation of the Plan? Would it result in a conversion of the case to chapter 7 or a dismissal? Would it possibly eliminate or reduce the distributions to unsecured creditors?

While arguably the Plan leaves open the possibility that the United States could file a request for allowance of an administrative expense claim, if the Government prevails in the Appeal, the Government should not be forced to meet 11 U.S.C. § 503(b)’s standards to obtain a refund. Instead, a separate reserve for the United States should be established to ensure that if the United States wins its Appeal, THD or any liquidating trustee will have sufficient funds to provide the refund.

The Plan should not be confirmed for additional reasons. It impermissibly interferes with the Government’s police and regulatory powers to prosecute fraud claims and criminal actions. It appears to strip the United States’ setoff and recoupment rights and prematurely disallows the Government’s claims while improperly granting third party releases in the form of improper compromises, injunctions, and exculpations. It might also be construed improperly to bar the United States from proceeding with its independent claims against non-debtor third parties by granting an exclusive right to the liquidating trustee to do so.

This Court’s August 29 Order held that CMS was violating the automatic stay by leaving the 2019 Fraud Suspension in place after the Petition Date. The Court held that payments from Medicare were property of the estate, that the exception to the automatic stay for the exercise of police and regulatory powers under Code § 362(b)(4) did not apply, and that it had jurisdiction because the post-petition suspension was not “inextricably intertwined with pre-petition fiscal reimbursement determinations.” 604 B.R. at 159-60. The Court enjoined CMS from any further suspension, escrow, recoupment, setoff, or other withholding of 'Medicare payments from True Health on and after the Petition Date.' It further ordered the United States to deliver 'all funds Defendants have withheld from True Health on and after the Petition Date In accordance with the Order and subject to the Appeal, the government has turned over to THD approximately $5.2 million (the ‘Ordered Payments’): $5,151,641.05 from CMS (‘CMS Ordered Payment’) and $45,222.83 from DHA.”

The Court scheduled a hearing to consider the objection for November 26, 2019.

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