United States Court of Appeals
For the First Circuit
No. 03-1933
IN RE HOLYOKE NURSING HOME, INC.,
Debtor,
HOLYOKE NURSING HOME, INC.,
Appellant,
v.
HEALTH CARE FINANCING ADMINISTRATION,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Frank H. Freedman, Senior U.S. District Judge]
Before
Selya, Circuit Judge,
Cyr, Senior Circuit Judge,
and Lynch, Circuit Judge.
Paul R. Salvage, with whom Justin H. Dion and Bacon & Wilson,
P.C. were on brief for appellant.
Eugene B. Berman, J.D., Kerry David Strayer, and Kamberg,
Berman, P.C. on brief for Official Unsecured Creditors' Committee.
Karen L. Goodwin, Assistant United States Attorney, with whom
Michael J. Sullivan, United States Attorney, was on brief for
appellee.
June 8, 2004
CYR, Senior Circuit Judge. Chapter 11 debtor Holyoke
Nursing Home, Inc. ("Holyoke") and its official unsecured
creditors’ committee challenge a bankruptcy court ruling which
awarded summary judgment to the Health Care Financing
Administration (“HCFA”) on Holyoke’s adversary proceeding complaint
that HCFA’s postpetition efforts to collect prepetition Medicaid
overpayments to Holyoke either constituted preferential transfers
or violated the automatic stay. We affirm the judgment.
I
BACKGROUND
In 1990, Holyoke became a participant in the Medicare
Reimbursement Program pursuant to a Provider Agreement whereby HCFA
periodically reimburses health care providers like Holyoke for the
estimated costs of services they have provided to Medicare
patients, 42 U.S.C. § 1395g(a), subject to an annual audit aimed at
determining the reasonableness of the costs of those services, id.
§ 1395x(v)(1)(A). In the event HCFA determines that the costs of
a provider’s past reimbursement requests were either overstated or
understated, HCFA is authorized by statute to make “necessary
adjustments [to the provider’s current reimbursement requests] on
account of previously made overpayments or underpayments.” Id. §
1395g(a); 42 C.F.R. §§ 405.1803(c), 405.371(a)(2), 405.373,
413.64(f).
In 2000, HCFA determined that it had overpaid Holyoke
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$373,639 for cost years 1997 and 1998, and proceeded to deduct a
portion of the overpayment and interest – viz., $177,656.25 – from
Holyoke’s pending reimbursement requests for cost-year 2000. In
late 2000, Holyoke filed a voluntary chapter 11 petition, and
thereupon commenced the instant adversary proceeding against HCFA,
contending that HCFA’s prepetition deductions ($99,965.97)
constituted voidable preferential transfers, see 11 U.S.C. §
547(b), and that its postpetition deductions ($77,690.28) were
effected in violation of the automatic stay, see id. § 362(a)(7).
In due course, the bankruptcy court entered summary
judgment for HCFA, holding that the HCFA deductions from current
reimbursement requests were in the nature of recoupment, and
constituted neither voidable preferences nor violations of the
automatic stay. In re Holyoke Nursing Home, Inc., 273 B.R. 305,
312 (Bankr. D. Mass. 2002). The district court denied Holyoke’s
intermediate appeal in an unpublished opinion.
II
DISCUSSION
The lone issue on appeal – one of first impression in
this circuit – is whether the HCFA deductions for a portion of the
1997-98 overpayments it made to Holyoke are more akin to a setoff,
whose collection normally is barred by the automatic stay, see 11
U.S.C. § 362(a)(7) (staying “the setoff of any debt owing to the
debtor that arose before the commencement of the [bankruptcy]
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case"), or to a recoupment, which normally is not barred. See
United Structures of Am., Inc. v. G.R.G. Eng’g, S.E., 9 F.3d 996,
999-1000 (1st Cir. 1993); see also Malinowski v. N.Y. State Dep’t
of Labor (In re Malinowski), 156 F.3d 131, 133 (2d Cir. 1998). As
the conclusions of law entered by the bankruptcy court rest upon
its construction of the Medicare Act and the Bankruptcy Code, our
review is de novo. See In re Cumberland Farms, Inc., 284 F.3d 216,
224 (1st Cir. 2002).
The pertinent distinction between a setoff and a
recoupment is whether the debt owed the creditor (viz., HCFA) arose
out of the “same transaction” as the debt the creditor owes the
debtor. For example, if A were to buy a truck worth $1000 from B,
but A finds that he must expend $100 to put the truck back into
working condition, A might send B a check for only $900, rather
than pay B $1000 and await a $100 refund from B. The $100 A
recovers by deducting it from the amount he owes B constitutes a
recoupment because the reciprocal obligations arose out of the same
transaction, viz., the purchase-sale of the truck. Had B filed for
bankruptcy protection, A could recoup the $100 prepetition debt
from B without violating the automatic stay because “it would be
inequitable for [B] to enjoy the benefits of that transaction
without also meeting its obligations.” Univ. Med. Ctr. v. Sullivan
(In re Univ. Med. Ctr.), 973 F.2d 1065, 1081 (3d Cir. 1992)
(emphasis added). Thus, in essence the recoupment doctrine
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constitutes an equitable exception to the Bankruptcy Code §
362(a)(7) prohibition against offsetting reciprocal debts.
However, were A to buy the same truck from B, but instead
of sending a $1000 check to B, sends a $900 check (deducting the
$100 B still owes him for a bicycle A sold B earlier), the $100
which A has deducted constitutes a setoff because the mutual
obligations did not arise out of the same transaction, but from
different transactions, viz., the sale of the bicycle and the sale
of the truck. Upon the intervention of B’s bankruptcy proceeding,
Bankruptcy Code § 362(a)(7) would prohibit A from effecting such a
deduction, and A's claim for $100 would be collectible (if at all)
through the normal distributive mechanisms prescribed by the
Bankruptcy Code. See United Structures, 9 F.3d at 999-1000.
Neither the Medicare statute, the Bankruptcy Code, nor
their respective legislative histories expressly treats the issue
before us, and other courts of appeals have split on the issue.
Holyoke relies upon In re University Medical Center, 973 F.2d 1065
(3d Cir. 1992), which held that HCFA’s deduction of these Medicare
overpayments constituted a setoff, rather than a recoupment. The
court there reasoned that since HCFA annually pays providers only
for medical services provided in the current cost year, each annual
payment constitutes a distinct and segregable “transaction,” and
that the offsets HCFA effected in order to recover overpayments
HCFA had made in prior "cost years" – and which necessarily were
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paid for entirely different medical services – did not arise from
the “same transaction” as the payments made to cover the provider’s
current cost-year expenditures. Id. at 1081-82. The Third Circuit
is the only court of appeals which has adopted this rationale to
date. In United States v. Consumer Health Services of America,
Inc., 108 F.3d 390 (D.C. Cir. 1997), and In re TLC Hospitals, Inc.,
224 F.3d 1008 (9th Cir. 2000), the District of Columbia Circuit and
the Ninth Circuit have held that recoveries of these Medicare
overpayments relating to previous cost years constitute
transactions in the nature of recoupment. These courts note that
subsection 1395g(a) does not compartmentalize HCFA’s liability for
provider services into a year-to-year determination, but that it
expressly defines and modifies HCFA’s liability for the provider’s
current cost-year services as the provider costs incurred in that
year “with necessary adjustments on account of previously made
overpayments or underpayments.” See Consumer Health Servs., 108
F.3d at 394. Thus, “Congress rather clearly indicated that it
wanted a provider’s stream of services to be considered one
transaction for purposes of any claim the government would have
against the provider.” Id. at 395 (emphasis added); see also TLC
Hosps., 224 F.3d at 1012; In re Slater Health Ctr., Inc., 306 B.R.
20, 25 (D.R.I. 2004). Moreover, the interpretation favored by the
District of Columbia Circuit and the Ninth Circuit has been
embraced by the overwhelming majority of district and bankruptcy
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courts nationwide which have ruled to date.
We likewise accept the majority view, and hold that the
HCFA recovery of the $177,656.25 in overpayments previously made to
Holyoke constituted a transaction in the nature of a recoupment,
rather than a setoff. As such, it was neither a voidable
preferential transfer nor a violation of the automatic stay. Both
the Medicare statute and the provider agreement – by contemplating
HCFA’s payment of estimated costs, corrective audits, and
retroactive adjustments or partial adjustments for overpayments and
underpayments in determining HCFA’s net liability for current cost-
year services – strongly indicate that the contractual relationship
between HCFA and Holyoke constitutes one, ongoing, integrated
transaction.1
Holyoke further contends that, even if HCFA’s overpayment
adjustments constitute recoupments, recoupment is an equitable
doctrine, and therefore the case should be remanded to the
bankruptcy court to determine the appropriate equitable balance to
be struck as between itself and HCFA. Holyoke notes, for instance,
1
In the alternative, HCFA argues that its deductions for past
overpayments do not implicate the automatic stay, because §
1395g(a) defines HCFA’s current liability to Holyoke as the amount
of Holyoke’s current cost-year expenditures less any past
overpayments. Thus, the HCFA overpayments never became either
Holyoke’s property or property of its chapter 11 estate.
Therefore, these HCFA deductions could not be considered a
collection action involving property of the estate against which
the automatic stay is designed to forfend. As we conclude that
these HCFA deductions were recoupments, supra, we need not address
the alternate argument advanced by HCFA.
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that such recoupments for prepetition overpayments may either cut
off or drastically reduce a bankrupt provider’s most prominent cash
flow, thereby diminishing the prospects for a successful chapter 11
reorganization, and jeopardizing the availability of healthcare to
Medicare recipients. Holyoke argues, on the other hand, that HCFA
will not be deprived of all recovery, but likely will be able to
recover (albeit partially) on its overpayment claims under
Holyoke’s chapter 11 Plan.
We perceive no need for equitable balancing. First, the
recoupment doctrine is equitable for the very reason that “it would
be inequitable for [Holyoke] to enjoy the benefits of [the same]
transaction without also meeting its obligations.” Univ. Med.
Ctr., 973 F.2d at 1081 (emphasis added). Thus, HCFA was
overcharged for the services provided by Holyoke in 1997 and 1998,
and in equity, Holyoke should not be allowed to retain the
windfall. Moreover, to allow these overpayments to become property
of the Holyoke bankrupt estate would mean that its estate might
apply a portion of those government-provided funds to satisfy
Holyoke’s other debts, thus violating the manifest congressional
intent that HCFA expend such funds only to defray the costs of
services provided to Medicare beneficiaries. Cf., e.g., In re LAN
Tamers, Inc., 329 F.3d 204, 212 (1st Cir.) (noting that inclusion
of government funds as "property of estate" would divert those
funds to the other general creditors of the debtor, rather than to
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the purpose plainly intended by Congress), cert. denied, 124 S. Ct.
808 (2003).
Second, even assuming arguendo that further equitable
balancing is permissible, the equitable powers of the bankruptcy
court do not accord it "a roving commission to do equity," In re
Ludlow Hosp. Soc'y, Inc., 124 F.3d 22, 27 (1st Cir. 1997) (citation
omitted), nor "authorize courts to create substantive rights that
are otherwise unavailable under the Code, or to expand the
contractual obligations of parties." Id. (quoting Official,
Unsecured Creditors' Comm. v. Stern (In re SPM Mfg. Corp.), 984
F.2d 1305, 1311 (1st Cir. 1993)). As we conclude that Congress
contemplated that the Medicare provider agreements would constitute
a single, ongoing, and integrated transaction, the equitable powers
of the bankruptcy court do not entitle it to second-guess
Congress’s implicit policy choices. Both by statute and by
contract, the HCFA has the unqualified right to recoup these
overpayments in full, and to return the funds to the public fisc,
where they can be used to fund other facilities providing care to
Medicare beneficiaries. In our view, public policy would be ill-
served by permitting insolvent providers – like Holyoke – a
windfall at the expense of other Medicare providers which have
managed their facilities prudently to avoid chapter 11.
Accordingly, we conclude that a remand to the bankruptcy court for
a balancing of the equities is not warranted.
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AFFIRMED.
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