Ludlow Hosp. Soc., Inc., In re

Decision Date04 June 1997
Docket NumberNo. 97-1014,97-1014
Citation124 F.3d 22
Parties, Medicare & Medicaid Guide P 45,555 In re LUDLOW HOSPITAL SOCIETY, INC., Debtor. David J. NOONAN, Trustee, Plaintiff, Appellant, v. SECRETARY OF HEALTH AND HUMAN SERVICES, Defendant, Appellee. . Heard
CourtU.S. Court of Appeals — First Circuit

Claudia J. Reed, Springfield, MA, with whom David J. Noonan and Cohen, Rosenthal P.C. were on brief for appellant.

Jeffrey Clair, Attorney, Appellate Staff Civil Division, Department of Justice, with whom Frank W. Hunger, Assistant Attorney General, Washington, DC, Donald K. Stern, United States Attorney, Boston, MA, and William Kanter, Attorney, Appellate Staff Civil Division, Department of Justice, Washington, DC, were on brief, for appellee.

Before TORRUELLA, Chief Judge, CYR, Senior Circuit Judge, and BOUDIN, Circuit Judge.

CYR, Senior Circuit Judge.

David J. Noonan, chapter 7 trustee ("the Trustee") for Ludlow Hospital Society, Inc. ("the Hospital"), appeals a district court judgment vacating two bankruptcy court orders entered pursuant to Bankruptcy Code § 105, 11 U.S.C. § 105(a). The challenged orders purportedly extended the one-year regulatory deadline imposed by the Secretary, United States Department of Health and Human Services ("HHS"), for hospitals formerly participating in the Medicare program to sell their capital assets and claim supplemental reimbursement from HHS for certain capital-asset depreciation credits. As we conclude that the bankruptcy court exceeded its equitable powers under Bankruptcy Code § 105, we affirm the district court judgment.

I BACKGROUND

Until it closed on February 17, 1995, the Hospital had participated in the Medicare Upon its closure, the Hospital's participation in the Medicare program terminated as well. 2 HHS administrative regulations allow a one-year post-termination period within which hospitals that previously participated in the Medicare program must sell their Medicare-related capital assets as a precondition to recapturing any pretermitted capital-asset depreciation credits from HHS. See 42 C.F.R. § 413.134(f)(3). Thus, a hospital which has closed would be eligible for further depreciation reimbursements from HHS on a Medicare-related capital asset which was sold within one year after its closure for less than its depreciated basis. 3

program, receiving annual HHS reimbursements for inpatient operating costs, as well as capital-asset depreciation credits, relating to its provision of services to Medicare recipients. Participating hospitals which retain ownership of the capital assets used to provide services to their Medicare recipients are entitled to periodic reimbursement for estimated actual depreciation on those assets, as determined under accepted accounting practices. See 42 U.S.C. § 1395x(v)(1)(O)(ii) (Medicare statute authorizing HHS Secretary to implement regulations detailing asset-depreciation methodologies). 1

At the time, HHS regulations allowed hospitals forty-five days after their withdrawal from the Medicare program to submit a final report outlining all reimbursable Medicare costs incurred prior to their withdrawal. See id. § 413.24(f) (1994). An administrative extension could be obtained from HHS on a showing that hospital operations had been "significantly affected due to extraordinary circumstances over which the [hospital] ha[d] no control, such as flood or fire." Id. § 413.24(f)(2)(ii) (1994). The HHS regulations likewise allow hospitals a three-year period within which to reopen and amend a final cost report which was timely filed. See id. § 405.1885. Without opposition from the government, the Trustee obtained two extensions of the forty-five-day filing deadline from the bankruptcy court and the Hospital's final cost report was submitted to HHS within the extended deadline. 4

The Trustee proceeded to attempt to sell the Hospital's capital assets, anticipating that the sale price might not equal their depreciated basis, see supra notes 1 & 3, and that the chapter 7 estate might therefore claim supplemental Medicare reimbursements under the aforementioned HHS capital-asset-depreciation-adjustment provision. See id. § 413.134(f)(3). It soon became apparent, however, that the capital assets could not be sold by February 17, 1996, the first anniversary of the Hospital's closure and the deadline for realizing a depreciation-adjustment reimbursement under 42 C.F.R. § 413.134(f)(3).

Therefore, on February 8, 1996, the Trustee sought equitable relief from the bankruptcy court under Bankruptcy Code § 105(a), extending the one-year period for selling the Hospital's capital assets beyond the original February 17 deadline, in order not to forfeit the potential depreciation-adjustment claim. The Secretary objected, on the grounds that 42 C.F.R. § 413.134(f)(3) itself permits neither exceptions nor extensions and that the bankruptcy court accordingly lacked the equitable The bankruptcy court granted the extension over the Secretary's objection. 5 It relied upon the equitable powers conferred by Bankruptcy Code § 105(a), reasoning that: (1) in the special context of bankruptcy proceedings, the rigid one-year HHS deadline for selling capital assets was unreasonable, since a newly-appointed trustee may require more time to marshal estate assets; (2) strict compliance with the one-year HHS deadline would result in a "windfall" to HHS and deprive the Hospital of valuable assets (viz., depreciation-adjustment reimbursements), to which it would otherwise be "entitled;" (3) an extension would not harm HHS, as the Trustee would not be allowed to file a depreciation-adjustment reimbursement claim based on the appraised value of the capital assets after February 17, 1996; and (4) HHS was estopped from contesting the bankruptcy court order, as it had acquiesced in two previous extensions of the forty-five-day period for filing the final cost report, see 42 C.F.R. § 413.24(f); supra note 4.

power to engraft an exception, pursuant to Bankruptcy Code § 105(a), which would bestow "substantive rights" upon the chapter 7 estate not authorized under the HHS regulations.

The district court vacated the bankruptcy court order on intermediate appeal and the Trustee appealed. Meanwhile, the Trustee consummated a sale of the capital assets and submitted a reimbursement claim to HHS, estimated at between $300,000 and $1,000,000.

II DISCUSSION
A. Equitable Estoppel 6

The Trustee first insists that HHS is estopped from claiming that the bankruptcy court lacked authority, under Bankruptcy Code § 105(a), to extend the one-year filing deadline prescribed in § 413.134(f)(3), since the government had acquiesced in two earlier bankruptcy court extensions of the forty-five-day deadline for filing the Hospital's final cost report. 7 The Trustee essentially suggests that the verbal assurances from government counsel, see supra note 4, that there would be no opposition to the two extensions of the forty-five-day period for filing the final cost report, coupled with HHS acquiescence thereto, make this an "unusual" case in which equitable estoppel may be invoked against the government. The Trustee argues that the district court erred in ruling that he needed to show that the government had engaged in "affirmative misconduct," since All the authorities relied upon by the Trustee predated Office of Personnel Mgt. v. Richmond, 496 U.S. 414, 420-22, 110 S.Ct. 2465, 2469-70, 110 L.Ed.2d 387 (1990), in which the Supreme Court unequivocally observed that, at a bare minimum, its earlier precedents abjured any application of the doctrine of estoppel absent a showing of "affirmative misconduct" by the government. See, e.g., LaFlower v. United States, 849 F.2d 8, 11-12 (1st Cir.1988); United States v. Ven-Fuel, Inc., 758 F.2d 741, 761 (1st Cir.1985). The evidence adduced by the Trustee came up well short of the Richmond benchmark.

the United States Supreme Court has never embraced lower court decisions which require such proof where a party seeks monetary recoveries (i.e., invading the public fisc). See Schweiker v. Hansen, 450 U.S. 785, 788, 101 S.Ct. 1468, 1470-71, 67 L.Ed.2d 685 (1981); Akbarin v. INS, 669 F.2d 839, 842 (1st Cir.1982). According to the Trustee, HHS should be estopped even assuming its earlier acquiescence was erroneous or inadvertent, as long as the Trustee reasonably relied to his detriment on the government's assurances. We conclude that the bankruptcy court erred.

First and foremost, the Trustee and the bankruptcy court never afforded HHS itself a meaningful opportunity to respond to the § 413.24(f) extension motions; the first motion was never served on either the government or HHS, and the second motion was allowed by the bankruptcy court before HHS could file a formal response. See supra note 4. Second, the Trustee reads far too much into the oral assurances given by the Assistant United States Attorney (AUSA) in March 1995, who simply stated that the government did not intend to oppose extension of the forty-five-day deadline. As there was no mention or suggestion that any deadline extensions were to be predicated on Bankruptcy Code § 105(a), however, there can have been no implicit concession that the extensions the Trustee was seeking were within the equitable power of the bankruptcy court under Bankruptcy Code § 105(a).

Moreover, the government's ready acquiescence to the two earlier forty-five-day extensions is hardly remarkable, given that the HHS regulations themselves permit HHS to grant such extensions in various extenuating circumstances. See 42 C.F.R. § 413.24(f)(2)(ii) (hospital may obtain extension of 45-day deadline if its operations are "significantly affected due to extraordinary circumstances over which the [hospital] has no control, such as flood or fire"); id. § 405.1885 (hospital may be allowed to reopen and amend final cost report for up to three years). Whereas the one-year deadline...

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