Fifth Circuit Joins Circuit Split Upholding Bankruptcy Court Jurisdiction to Hear Social Security Claims: Case Has Impact for Health Care Bankruptcies

Kramer Levin Naftalis & Frankel LLP

Kramer Levin Naftalis & Frankel LLP

The Bottom Line

In a case that could impact health care bankruptcies, where jurisdiction over Medicaid and Medicare claims in bankruptcy are often disputed, the Fifth Circuit, in In re Benjamin v. U.S. Social Sec. Admin., Case No. 18-20185, 932 F.3d 293 (5th Cir. 2019), reversed the district court’s decision, holding bankruptcy courts are not barred from exercising their jurisdiction to hear Social Security claims. Following the Debtor’s Chapter 7 bankruptcy filing, he initiated an adversary proceeding demanding the Social Security Administration repay the amount it collected from the Debtor on account of an overpayment he received for almost a year and a half. In overturning the district court’s decision, the Fifth Circuit found that the plain language of 42 U.S.C. § 405(h) did not bar bankruptcy courts from relying on their general bankruptcy jurisdictional grant under 28 U.S.C. § 1334(b) to hear the Debtor’s case.

What Happened?

Kenneth Benjamin (the Debtor or Benjamin) was the designated beneficiary of his sister’s disability benefits. In September 2013, the Social Security Administration (the SSA) informed the Debtor it would recoup an overpayment totaling $19,286.90 on account of disability checks the Debtor continued to receive after his sister’s benefits expired in April 2012. The Debtor and his sister requested reconsideration and waiver of the overpayment. In August 2014, before the SSA considered the waiver request, the SSA began to withhold a portion of the Debtor’s Social Security check every month. In July 2016, the SSA denied the Debtor’s waiver request, and the Debtor subsequently timely appealed the denial to an administrative law judge.

In May 2017, the Debtor filed for Chapter 7 bankruptcy protection and initiated an adversary proceeding against the SSA alleging the agency illegally collected $6,000 in overpayments from him, in violation of the SSA’s regulations, and demanded an additional $536 on account of overpayments collected shortly before the bankruptcy filing. The SSA moved to dismiss the Debtor’s claims, arguing the Debtor alleged only regulatory violations, which must first be exhausted before the administrative-appeal process. The Bankruptcy Court granted the SSA’s motion to dismiss, and the district court affirmed on jurisdictional grounds.

On appeal, the Fifth Circuit first examined the string of cases from the Third, Seventh, Eighth and Eleventh Circuits, all of which focused on the legislative history of Section 405(h) and applied the recodification canon. As originally enacted, 42 U.S.C. § 405(h) barred all actions against the United States and the Commissioner of Social Security brought under 28 U.S.C. § 41, which at the time contained all jurisdictional grants to the federal courts. However, in 1948, Congress recodified Section 24 under title 28, providing separate jurisdiction grants for federal questions, diversity, bankruptcy and suits against the government. In 1984, Congress finally came around to recodifying Section 405(h) in a technical corrections bill and revised the section to its current form: “No action against the United States, the Commissioner of Social Security, or any officer or employee thereof shall be brought under section 1331 or 1346 of Title 28 to recover on any claim arising under [Title II of the Social Security Act].” Id. at 296 (citing 42 U.S.C. § 405(h)). In line with the Third, Seventh, Eighth and Eleventh Circuits, the SSA argued the 1984 amendment was a recodification and not a substantive change to the section, and Congress intended to continue to bar the bankruptcy court’s jurisdiction even though Section 1334 (the jurisdictional grant for bankruptcy courts) was not specifically referenced in Section 405(h).

The Fifth Circuit, however, opted to join the Ninth Circuit, which was the “only circuit to read §405(h)’s third sentence according to its plain text.” Id. at 297. The Fifth Circuit noted that “[w]hile the recodification canon is useful in some instances, it only applies . . . in the absence of a clear indication from Congress that it intended to change the law’s substance.” Id. at 298. The Fifth Circuit argued that its sister courts, other than the Ninth Circuit, ignored the most obvious source of congressional intent — the actual words in the statute. The Fifth Circuit interpreted the third sentence of Section 405(h) to “mean what it says,” which is nothing about Section 1334. Id. at 300. Upon establishing that the Bankruptcy Court has jurisdiction to hear Social Security claims, the Fifth Circuit remanded to the Bankruptcy Court. 

In guiding the Bankruptcy Court upon remand, the Fifth Circuit next examined the second sentence of Section 405(h): “No findings of fact or decision of the Commissioner of Social Security shall be reviewed by any person, tribunal, or governmental agency except as [stated in Section 405(g)].” This provision both channels claims challenging a certain type of agency decision in Section 405(g) and ensures that Section 405(g) is the “sole jurisdictional avenue for the channeled claims.” The Fifth Circuit determined this provision of Section 405(h) applied only where the “would-be plaintiff is challenging a decision regarding his entitlements to benefits.” Id. at 301. The Fifth Circuit left it to the Bankruptcy Court to determine on remand whether the Debtor’s claims were primarily about entitlement of benefits (i.e., payment of money) and therefore channeled by Section 405(h)’s second sentence into Section 405(g). The Fifth Circuit concluded that if, on remand, the Bankruptcy Court determined the Debtor’s claims are not channeled, the Bankruptcy Court has jurisdiction under Section 1334 to hear the Debtor’s claims.

Following the Fifth Circuit’s decision, the SSA requested a rehearing en banc. Notably, after reviewing the petition for rehearing, the Fifth Circuit withdrew its original opinion and entered an amended opinion to clarify that the review provisions are not restricted to cases involving disability decisions. Instead, the second sentence of Section 405(h) applies where a plaintiff is challenging a decision to his entitlement to benefits. The SSA asserts a number of other grounds for rehearing. The Debtor also joined in the SSA’s request for rehearing but requested the court not take the case en banc. The request for rehearing en banc was denied on Nov. 7, 2019.

Why This Case Is Interesting

Health care bankruptcy cases often involve issues of competing jurisdiction over the bankruptcy estate’s rights and governmental authority, particularly with respect to Medicare and Medicaid payments. Benjamin has the ability to provide support to a debtor’s estate to resolve disputes that can impact the debtor (and its operations and liquidity). While the circuit split on this jurisdictional issue continues to deepen, it’s unclear whether the Supreme Court will weigh in on the issue in the foreseeable future in light of its 2017 denial of certiorari in Florida Agency for Health Care Administration v. Bayou Shores SNF LLC (In re Bayou Shores SNF LLC), 828 F.3d 1297 (11th Cir. July 11, 2016), cert. denied 137 S.Ct. 2214 (2017), involving appeal of the same jurisdictional question over Medicare and Medicaid claims. It is only a matter of time before the remaining circuits take a position on the bankruptcy court’s jurisdiction over Social Security, Medicare and Medicaid claims. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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