Opinion
Case No. 12-20666
07-12-2013
In re: COMMUNITY MEMORIAL HOSPITAL a/k/a CHEBOYGAN MEMORIAL HOSPITAL, Debtor(s).
Chapter 11
Hon. Daniel Opperman
OPINION DENYING UNITED STATES' MOTION FOR AN ORDER ALLOWING A
SECTION 507(b) ADMINISTRATIVE EXPENSE FOR POST-PETITION MEDICARE
PAYMENTS COVERED BY CASH COLLATERAL ORDERS
The issue in this case is whether the administrative claim filed by the United States, on behalf of its Centers for Medicare & Medicaid Services ("CMS") is entitled to super priority status pursuant to 11 U.S.C. § 507(b).
FACTUAL BACKGROUND
The facts are undisputed regarding the issue before the Court. Debtor filed this Chapter 11 bankruptcy case on March 1, 2012. A Medicare provider agreement existed for each of Debtor's operating entities, which consisted of a critical access hospital, a skilled nursing facility, and three rural health clinics. On the date of the bankruptcy filing, the Debtor had substantial liability to CMS for Medicare overpayments. Five days after the bankruptcy petition was filed, CMS placed an administrative freeze on Medicare payments to the Debtor, and on March 15, 2013, the Debtor, CMS and the Official Committee of Unsecured Creditors ("Creditors' Committee") entered into a Stipulation, as memorialized in a Second Interim Order for Use of Cash Collateral entered on March 16, 2012 (Docket #82).
The relevant terms of the Second Interim Order were expanded in a Third Interim Order for Use of Cash Collateral entered on March 27, 2012 (Docket #121). The relevant terms of the Third Interim Order states:
b. As adequate protection of the recoupment and setoff rights in amounts paid to Debtor by Centers for Medicare and Medicaid Services (the "CMS payments"), CMS shall have, pursuant to sections 361, 363, and 552(b) of the Bankruptcy Code, valid, binding, enforceable and perfected replacement liens (the "CMS liens") on all Medicare payments, under each and every Medicare provider agreement number used by the Debtor, as adequate protection for CMS's agreement to forego the setoff or recoupment rights that it has in the CMS payments to be paid to the debtor as provided in subparagraph c, below. The CMS liens shall not be limited to the amounts actually paid under a particular provider agreement number and are in addition to, and shall not limit, CMS's rights of recoupment and setoff and thus may attach to any Medicare payments owed after exercise of recoupment and setoff rights. The CMS liens shall also be entitled to first priority on any Medicare payments that may be made under any on the Debtor's Medicare provider numbers.Third Interim Order, Docket #121, at 5).
c. Limitation on the CMS Payments. The CMS payments referenced in Paragraph 3(b) will be made only through the earlier of the closing of the proposed sale to McLaren or another buyer, or April 3, 2012, and are subject to a cap of $400,000, which sum is in addition to the capped amount of $500,000 released pursuant to the Second Interim Cash Collateral Order (defined below). CMS is not guaranteeing, however, that the CMS payments will total $400,000 and is not required to advance any amounts over the reimbursement actually payable during such period as determined by CMS's applicable reimbursement rules and procedures. Debtor also understands and agrees that the CMS payments are net of the advance payment of $216,037.00 previously made to Debtor in February 2012 and will not contest CMS's treatment of that amount.
The parties do not dispute that the relevant period of time is March 15, 2012, to April 2, 2012. The amount originally sought by CMS for this time period was $552,341.59. At subsequent hearings, counsel for the Creditors' Committee and CMS have agreed that the current amount at issue is much less.
CMS asserts that because the replacement liens referenced in the Second and Third Interim Orders for Use of Cash Collateral proved to be insufficient adequate protection for the funds paid by CMS to the Debtor under these Orders, it is entitled to an administrative priority lien with super priority status under Section 507(b).
The Creditors' Committee objects to the Motion of CMS, asserting that the only recourse CMS has at this stage for Debtor's use of its cash collateral under the Second and Third Interim Orders-the Medicare reimbursement payments it released-would be the replacement liens and adequate protection payments offered and accepted. Additionally, the Creditors' Committee points out that CMS could have requested additional replacement liens, additional adequate protection, or the creation of a claim. The Creditors' Committee argues that CMS agreed to replacement liens only, and now that CMS realizes such are not worth as much as it had hoped, attempts to obtain more than what it bargained.
The Debtor and Citizens National Bank filed concurrences to the objection filed by the Creditors' Committee.
JURISDICTION
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334, 157(a) and E.D. Mich. LR 83.50. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B) (allowance or disallowance of claims against the estate).
The issues in this adversary proceeding arise from Title 11 of the United States Code and do not involve any matter which limits this Court's jurisdiction as detailed by the United States Supreme Court in Stern v. Marshall, -----U.S. ----, 131 S. Ct. 2594, 2608, 180 L.Ed.2d 475 (2011), and later by the Sixth Circuit Court of Appeals in Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012).
LAW
Section 507(b)
Section 507(b) states:
If the trustee, under section 362, 363, or 364 of this title, provides adequate protection of the interest of a holder of a claim secured by a lien on property of the debtor and if, notwithstanding such protection, such creditor has a claim allowable under subsection (a)(2) of this section arising from the stay of action against such property under section 362 of this title, from the use, sale, or lease of such property under section 363 of this title, or from the granting of a lien under section 364(d) of this title, then such creditor's claim under such subsection shall have priority over every other claim allowable under such subsection.11 U.S.C. § 507(b) (emphasis added).
Thus, by the clear language of this subsection, a Section 507(b) claim requires three criteria: (1) a provision of adequate protection by the trustee or debtor under Section 362, 363, or 364(d) to the holder of a claim secured by a lien on property; (2) such creditor must have a claim allowable under Section 507(a)(2); and (3) the claim must have arisen from a stay of action under 362, from the use, sale or lease of property under Section 363, or from the granting of a lien under Section 364(d).
Section 503(b)(1)(A)
"The Bankruptcy Code grants priority to certain administrative expenses, such as the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case." In re Sunarhauserman, Inc., 126 F.3d 811, 816 (6th Cir. 1997). "Claims for administrative expenses under § 503(b) are strictly construed because priority claims reduce the funds available for creditors and other claimants." In re Federated Dept. Stores, Inc., 270 F.3d 994, 1000 (6th Cir. 2001) (citations omitted).
The "well-accepted 'benefit to the estate' test . . . states that a debt qualifies as an 'actual, necessary' administrative expense only if (1) it arose from a transaction with the bankruptcy estate and (2) directly and substantially benefitted the estate." In re Sunarhauserman, Inc., 126 F.3d 811, 816 (6th Cir. 1997) (citing Employee Transfer Corp. v. Grigsby (In re White Motor Corp.), 831 F.2d 106, 110 (6th Cir.1987)). "The benefit to the estate test limits administrative claims to those where the consideration for the claim was received during the post-petition period." Id. "[R]egardless of the substantive law on which the claim is based, the proper standard for determining that claim's administrative priority looks to when the acts giving rise to a liability took place, not when they accrued. Id. at 818.
ANALYSIS
The relationship between CMS and the Debtor is not typical.
What must be remembered is that the relationship between the Secretary and a provider is no ordinary business relationship. A provider is the Secretary's surrogate in implementing an important governmental social welfare program and to treat the Secretary as an ordinary creditor and the provider as an ordinary debtor substantially distorts that relationship.Advanced Professional Home Health Care v. Bowen (In re Advanced Professional Home Health Care), 94 B.R. 95, 97 (E.D. Mich. 1988).
As stated by CMS early in this case, its rights as set by Congress are recoupment and setoff, and the Bankruptcy Code does not override these rights. Advanced Professional, 94 B.R. at 97. Recoupment rights are not an interest in property but are instead a statutory adjustment that defines the proper payment due to a provider. United States v. Consumer Health Serv. of America, 108 F.3d 390 (D.C. Cir. 1997); Slater Health Ctr., Inc. v. United States (In re Slater Health Ctr., Inc.), 398 F.3d 98 (1st Cir. 2005).
Recoupment is a defense, not a claim, and does not result in an affirmative recovery. See Kelly v. Deutsche Bank Nat'l Trust Co., 789 F. Supp.2d 262, 266 (D. Mass. 2011); Mayco Plastics, Inc. v. TRW Vehicle Safety Sys., Inc. (In re Mayco Plastics, Inc.), 389 B.R. 7 (Bankr. E.D. Mich. 2008).
The first prong of Section 507(b) is whether the Debtor provided adequate protection to CMS, as a holder of a claim, under Section 362, 363, or 364(d). The clear language of the Second and Third Interim Orders, which were stipulated to by CMS, provided CMS with a replacement lien on all Medicare payments as its adequate protection. This was in exchange for CMS's agreement to forego any setoff or recoupment rights it might otherwise be entitled to exercise immediately. The replacement liens granted to CMS in exchange for release of the administrative freeze of the Medicare reimbursement funds was a negotiated agreement to address the critical cash shortage facing the Debtor at the time so that it could keep operating.
To date, CMS has not supplied the Court with authority that it had a claim by virtue of the agreements it had with the Debtor. Recoupment cannot create a claim, and setoff in this case did not. CMS has carefully and correctly argued that its rights are statutory and contractual. Neither form the basis of a creation of a claim. As Advanced Professional reminds this Court, a substantial distortion occurs when CMS and the Debtor are treated as an ordinary creditor and debtor. The Court therefore finds that there is not the requisite claim as required by the first prong of Section 507(b).
Even though the Court has determined that CMS has not satisfied the first prong of Section 507(b), and is thus not entitled to super priority status, it will nevertheless examine whether CMS has an administrative claim under Section 503(b), entitled to priority under Section 507(a)(2), and for further support that CMS is not entitled to super priority status under Section 507(b). A basic premise of Section 503(b) is that the creditor hold a claim. Here, CMS holds a right to recoupment and setoff. The right of recoupment does not provide an independent basis for a claim. See Mayco Plastics, supra, and Oregon v. Harmon (In re Harmon),188 B.R. 421, 425 (B.A.P. 9th Cir. 1995) (internal quotation marks and citation omitted) ("Because recoupment only reduces a debt as opposed to constituting an independent basis for a debt, it is not a claim in bankruptcy, and is therefore unaffected by the debtor's discharge.").
Further, CMS's right to setoff does not amount to a separate claim against the Debtor under Section 503(b). Rather, CMS's right of setoff pursuant to Section 553 grants it a secured claim pursuant to Section 506(a) of the Bankruptcy Code, but only to the value of the amount subject to setoff. Neither Sections 553 or 506 create a claim above and beyond the amount or value of the right of setoff.
Finally, the parties carefully crafted the language of the Second and Third Interim Orders. CMS obviously did not want to infringe on its contractual rights and therefore disturb or distort its relationship with the Debtor. The use of "liens" in the Second and Third Interim Orders at best gave CMS protection from interference by this Court of that relationship. Instead, CMS relied on its familiar contractual and statutory rights, which, after the passage of time and closer examination, are insufficient to cover CMS. Had CMS or the Debtor stepped out of their familiar relationship and added a sentence creating a claim and thus a debtor-creditor relationship, CMS would have a claim and a basis to receive the super priority it now requests. Since that language does not exist in either the Second or Third Interim Orders, the Court denies the Motion of CMS.
Because the first two prongs of Section 507(b) have not been satisfied, the Court need not examine the remaining issues of CMS as a result of Sections 362, 363, or 364(d).
CONCLUSION
For the above-stated reasons, the Court determines that CMS is not entitled to priority status pursuant to Section 507(b) and, therefore, denies the Motion of CMS. The Court will enter an order consistent with this Opinion.
Not for Publication
______________________
Daniel S. Opperman
United States Bankruptcy Judge