A Texas bankruptcy judge on Thursday blocked a bid by the U.S. Department of Health and Human Services' Centers for Medicare and Medicaid Services to cut off payments for one of Genesis Healthcare's skilled nursing facilities in Alabama, entering a preliminary injunction in the Chapter 11 adversary proceeding.

At a hearing, U.S. Bankruptcy Judge Stacey Jernigan granted Genesis' request for a preliminary injunction that temporarily bars CMS from decertifying the debtor's 148-bed facility just north of Birmingham. The judge expressed concern about how patients would be affected if she allowed CMS to go forward with terminating a provider agreement.

"I find this tremendously upsetting," Judge Jernigan said, noting that evidence presented in the case showed that the 38 residents at the facility had few quality alternatives nearby.

Judge Jernigan found that Genesis was likely to succeed on the merits of a suit it brought in late September in which the debtor charged that allowing CMS to decertify the facility, called Magnolia Ridge, would disrupt patient care and threaten the company's Chapter 11 restructuring.

The judge also said the debtor could suffer irreparable harm if CMS were allowed to proceed, underlining the fact that patients would have to leave Magnolia Ridge while Genesis would lose out on potential proceeds from a sale of the facility.

"The debtor and all its various stakeholders are likely to suffer irreparable harm in the absence of the preliminary injunction," Judge Jernigan said.

The preliminary injunction bars CMS from terminating a provider agreement that qualifies facilities to participate in Medicare and Medicaid programs. It will also allow Magnolia Ridge to once again admit new patients.

CMS on Sept. 4 notified Magnolia Ridge that it intended to cancel the provider agreement because an earlier visit by state public health regulators allegedly uncovered conditions that put residents' health and safety in jeopardy.

But in filings later that month, Genesis said the regulators' concerns stemmed from an incident in May that didn't put any patients at risk.

The debtor also pointed to a report from Suzanne Koenig, one of the case's three ombudspeople, who visited Magnolia Ridge with her team and reported that it "provides quality and safe care to its residents, is an asset to the communities it serves, and does not pose imminent danger to the current residents it serves."

By contrast, Genesis said that terminating the provider agreement, closing the facility and transferring remaining residents would pose a "significant risk" to the residents.

At the hearing Thursday, Judge Jernigan voiced frustration with the government, saying at various points in the proceeding that she was "baffled" by its arguments and questioning why there wasn't a better solution than shutting down the facility.

She stressed that Magnolia Ridge could soon be sold to a new operator as part of Genesis' Chapter 11 efforts and said that as a bankruptcy judge, she had to balance "the law" and "the practical." Judge Jernigan also contrasted CMS's efforts in Genesis' case with regulators' role in the Chapter 11 of Prospect Medical, where she said regulators wanted perhaps more than any other constituency to ensure that people continued to have access to medical care.

"I apologize for any grumpiness that I may have shown," the judge said. "It's an indication of how upsetting I find this."

Judge Jernigan previously extended a temporary restraining order that put CMS's actions on pause.

Pennsylvania-based Genesis, a holding company for rehabilitation centers and nursing homes in 18 states, filed for Chapter 11 protection in July with plans for an asset sale.

Genesis is represented by Paul W. Hughes, Sarah P. Hogarth, Grace Wallack, Aleena Ijaz, Matthew L. Knowles, Daniel M. Simon, Emily C. Keil, William A. Guerrieri, Catherine T. Lee, Landon W. Foody, Marcus A. Helt and Jack G. Haake of McDermott Will & Schulte.

HHS and CMS are represented by Zachary C. Semple, Rodney A. Morris and Kirk T. Manhardt of the U.S. Department of Justice.

The bankruptcy case is In re: Genesis HealthCare Inc., case number 8:25-bk-80185, in the U.S. Bankruptcy Court for the Northern District of Texas.

The adversary proceeding is Sunbridge Gardendale Health Care Center LLC et al. v. Kennedy et al., case number 8:25-ap-08029, in the U.S. Bankruptcy Court for the Northern District of Texas.