65 B.R. 531 (Bkrtcy.D.Mass. 1986), 86-1043, In re WJM, Inc.

Docket Nº:Adv. No. 86-1043-JNG.
Citation:65 B.R. 531
Party Name:In re WJM, INC., Rockview, Inc., Walter M., Inc., Senior Care Associates, Inc., Debtors. WJM, INC., Rockview, Inc., Walter M., Inc., Senior Care Associates, Inc., Plaintiffs, v. COMMONWEALTH OF MASSACHUSETTS, Through its DEPARTMENT OF PUBLIC WELFARE, Defendants. Bankruptcy Nos. 86-10266-JNG, 85-01202-JNG, 86-10288-JNG and 86-10287-JNG.
Case Date:September 16, 1986
Court:United States Bankruptcy Courts, First Circuit

Page 531

65 B.R. 531 (Bkrtcy.D.Mass. 1986)

In re WJM, INC., Rockview, Inc., Walter M., Inc., Senior Care Associates, Inc., Debtors.

WJM, INC., Rockview, Inc., Walter M., Inc., Senior Care Associates, Inc., Plaintiffs,



Bankruptcy Nos. 86-10266-JNG, 85-01202-JNG, 86-10288-JNG and 86-10287-JNG.

Adv. No. 86-1043-JNG.

United States Bankruptcy Court, D. Massachusetts.

September 16, 1986

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[Copyrighted Material Omitted]

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Paul P. Daley, Hale & Dorr, Boston, Mass., for debtors/plaintiffs.

Despena F. Billings, Asst. Atty. Gen., Com. of Mass., Boston, Mass., for defendants.


JAMES N. GABRIEL, Bankruptcy Judge.

The matter before the Court is Count IV of the adversary complaint commenced on March 13, 1986 by WJM, Inc. ("WJM"), Rockview, Inc. ("Rockview"), Walter M., Inc. ("WMI") and Senior Care Associates, Inc. ("Senior Care") (collectively the "Plaintiffs") against the Commonwealth of Massachusetts, through its Department of Public Welfare (the "Department"). Through Count IV, WJM and Senior Care (collectively the "Debtors") seek the turnover of alleged preferential transfer payments to the Department. At a hearing on May 5, 1986, counsel for the Plaintiffs withdrew Counts I-III, the only other counts in the complaint. At that time, the Court also denied a Motion to Dismiss filed by the Department. A trial was held on Count IV on May 15 and May 16, 1986.

The dispute in Count IV of this adversary proceeding results from deductions made by the Department from current, pre-petition reimbursements to WJM and Senior Care to satisfy overpayments made by the Department to Rockview and WMI. The Debtors allege the setoffs are voidable preferences pursuant to 11 U.S.C. § 547 (b) 1 pure and simple. The Department

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counters with four alternative defenses: 1) that the deductions or setoffs were proper pursuant to 11 U.S.C. § 553; 2) that no transfers of interests of the Debtors in property resulted from the Department's offset procedure; 3) that the Debtors were not insolvent when the transfers occurred; and 4) that the offsets were made in the ordinary course pursuant to 11 U.S.C. § 547(c)(2). The Court will address each of the Department's arguments following a review of the facts.


The Plaintiffs are four corporations formed by Walter J. Mikolinski, Jr. ("Mikolinski") and/or Anthony Accaputo, Jr. ("Accaputo") to purchase and operate nursing homes. Rockview was organized in or around April, 1979 to operate the Mary Murphy Nursing Home ("Mary Murphy") in Jamaica Plain; WMI was organized on or about July 1, 1980 to operate the Middlesex Manor Nursing Home ("Middlesex Manor") in Framingham; WJM was organized on or about March 1, 1980 to operate the Winter Hill Nursing Home ("Winter Hill") in Somerville; and Senior Care was organized on or about April 1, 1982 to operate the Plainville Nursing Home ("Plainville") in Plainville. Between 1982 and 1985, Mikolinski and Accaputo owned Rockview, WMI, WJM and Senior Care jointly as fifty percent shareholders. 2 In September of 1985, Mikolinski sold his shares of stock in Rockview and WMI back to those two corporations for nominal consideration with the result that Accaputo became a 100% shareholder of both corporations. Likewise, Accaputo sold his shares of stock in WJM and Senior Care back to them for $1 with the result that Mikolinski became their sole shareholder.

The Plaintiffs furnish health care services to eligible persons under programs administered by the Department, particularly the Commonwealth's Medical Assistance Program. Cf. 42 U.S.C. § 1396 et seq. and M.G.L. c. 118E, § 1 et seq. Indeed, the four nursing homes serve almost exclusively indigent Medicare and Medicaid patients. Thus, Medicare/Medicaid reimbursements from the Department provide virtually the sole source of income for the four nursing homes.

Each year the four nursing homes sign provider agreements which govern their relationships with the Department. The provider agreements include inter alia the provider's promises to comply with all applicable state and federal regulations, cf. M.G.L. c. 118E, § 18(4), and to keep and maintain records sufficient to disclose fully to the Department the nature and extent of services and goods furnished to eligible recipients. They also include the Department's promises to reimburse the providers at rates set by the Massachusetts Rate Setting Commission and to afford the providers the right to appeal payment determinations and termination from the program. The provider agreements incorporate Department regulations, cf. 106 C.M.R. § 456.000 et seq., which establish the system for setting rates of reimbursement to

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providers furnishing services to patients eligible for public assistance.

The Commonwealth has adopted a retrospective payment system. Under that system, the rates of reimbursement are set by the Massachusetts Rate Setting Commission (the "Commission"), an agency established pursuant to M.G.L. c. 6A, § 32. The Commission sets per diem rates of reimbursement based upon the reasonable costs incurred by nursing home facilities during the rate year. Since the rates cannot be computed until actual cost data becomes available, each nursing home facility is given an interim per diem rate based upon the costs incurred in prior years adjusted for inflation. Nursing homes receive current payments on the basis of the interim rates. Because interim rates are estimated, adjustments for either underpayments or overpayments are inevitable when the final rates are set.

Regulations require that nursing homes submit annual cost reports known as RSC-1's. In them, each facility's expenses, income, and net worth are detailed and its ownership is disclosed, as well as that of other facilities in which the owner or owners have a direct or indirect ownership interest of 5% or more. These reports serve both as a statement of financial condition and a claim for reimbursement for expenses incurred in the care of publicly assisted patients. Additional reports known as RSC-2's and RSC-3's are required if a facility incurs rental expenses or management company or central office expenses. The RSC reports enable the Commission to establish final rates.

If the final rate is greater than the interim rate, the Department becomes liable to pay the underpayment. Conversely, if the final rate is lower that the interim rate, the provider is obligated to pay the Department the amount of overpayments received. In its discretion and pursuant to its regulations, the Department may deduct claims it has against a nursing home for overpayments from current and retroactive payments to that home or any other home related to that home by common ownership. See 106 C.M.R. § 456.703. 3

According to the Plaintiffs' complaint, prior to June 1985 the Commission had established final rates for Middlesex Manor for 1980 and 1981, the two years in which the nursing home had been owned by WMI, and for Mary Murphy for the three years in which that nursing home had been operated by Rockview, i.e., 1979, 1980 and 1981. The Plaintiffs indicate that the Commission, on or about June 26, 1985, notified WMI and Rockview of proposed final rates for 1982 that were on a cumulative annual basis lower than the interim 1982 rates had been. Accordingly, WMI and Rockview, once the proposed rates had been certified as final by the Commission, filed appeals of the 1982 final rates to the Division of Administrative Law Appeals. 4

When the final rates were set, the Department determined that both Rockview and WMI were indebted to it in substantial amounts. It, therefore, made demand upon them for the amounts of overpayments. Since no payments were forthcoming, the Department elected to offset portions of their debts against payments to related facilities, i.e., Plainville and Winter Hill. The following charts sets forth the relevant data:

Approximate Amount of

Date Setoff Debtor

----------- ---------- -----------

12/31/85 $ 7,708.00 Senior Care

1/5/86 12,391.65 WJM

2/3/86 11,027.25 WJM

2/3/86 5,386.14 Senior Care

2/27/86 33,227.46 WJM

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Within 90 days of these offsets, WJM and Senior Care filed for protection under Chapter 11 of the Bankruptcy Code, on March 4, 1986 and March 7, 1986, respectively. This adversary complaint was commenced shortly thereafter.

At the trial, the Debtors introduced the testimony of their accountant with respect to the elements of a preference. The Department introduced evidence relative to its insolvency defense, but relied upon the affidavits of Norman Flora 5 for all but its section 553 defense. The Department...

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