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September 2020: QE Rescues COVID-19 Treatment Funding for Rural Hospitals

September 2020

On July 8, 2020, the bankruptcy court in Greenville, North Carolina, entered an order authorizing the chapter 11 trustee in the CAH Acquisition Company 12, LLC case to transfer to our client, Rural Wellness, Inc., millions of dollars, which funds are to be used in a rural hospital for the express purpose of treating COVID-19 patients, over the sustained opposition of the U.S. Department of Health & Human Services (“DHHS”).  This was a first of its kind case addressing the CARES Act and the authority of bankruptcy courts in relation to CARES Act monies that end up in bankruptcy estates.

In February 2020, Quinn Emanuel’s client contracted to purchase the Fairfax Hospital, a 15-bed hospital located in Fairfax, Oklahoma, and the deal closed on March 20, 2020.  Seven days later, Congress passed and the president signed into law the CARES Act.  One part of the CARES Act had DHHS distribute $30 billion under the Provider Relief Fund to hospitals that billed Medicare in 2019 and would “attest” that the funds would be used to treat COVID-19 patients, upgrade equipment to address COVID-19, or replace revenue lost because of COVID-19.  No application was needed (or even existed), but if a recipient received funds it had to “attest” within a certain timeframe that the funds would be used for the requisite purposes.

DHHS sent nearly $3 million for the Fairfax Hospital—but to the bankruptcy trustee and not to the firm’s client.  DHHS took the position that under the CARES Act no funds could be transferred to hospital purchasers, but only to entities with tax identification numbers associated with the funds DHHS delivered, and that it wanted a nationwide, uniform policy and would not make exceptions for this bankruptcy case.  This meant that the hospital could easily lose critical funds necessary to prepare for and treat patients suffering from COVID-19, and yet there was no obvious way to proceed given that the bankruptcy court likely lacked jurisdiction to compel DHHS to change its policies.

Quinn Emanuel came up with a novel solution:  (i) the tax identification number would constitute property of the bankruptcy estate; (ii) the trustee would use the funds under Bankruptcy Code section 363; (iii)the firm’s client would be the trustee’s “subrecipient” for the cash the trustee had received, and, finally, (iv) the trustee would “attest” to the client’s use of the funds.  The firm drafted an agreement that protected the bankruptcy trustee from liability in the event the funds were not used as the hospital intended, ensured that the funds could be transferred to the hospital consistent with existing DHHS policies, and prohibited DHHS from exercising rights of setoff or recoupment.  DHHS filed a response stating that, while it did not consent to the relief requested, it also did not object, and even credited our client with crafting a “creative” solution.  The bankruptcy court approved it and the order become final and non-appealable.

The end result is that, through the firm’s work of crafting an agreement that had never been tested, a hospital serving a rural community is receiving critical funds, in the manner that Congress intended when it passed the CARES Act.