Memorial, Inc. v. Harris
| Decision Date | 28 March 1980 |
| Docket Number | No. 78-3169,78-3169 |
| Citation | 655 F.2d 905 |
| Parties | MEMORIAL, INC., dba Memorial Hospital of Panorama City, a Delaware Corporation, Plaintiff-Appellee, v. Patricia HARRIS, * Secretary of the United States Department of Health, Education and Welfare et al., Defendants-Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Henry Eigles, Dept. of HEW, Baltimore, Md., for defendants-appellants.
Steven Gourley (argued), Memel, Jacobs, Piernio & Gersh, Los Angeles, Cal., on brief; Arthur R. Chenen, Los Angeles, Cal., for plaintiff-appellee.
Appeal from the United States District Court For the Central District of California.
Before GOODWIN and TANG, Circuit Judges, and EAST, ** District Judge.
This is a companion case to Pacific Coast Medical Enterprises v. Harris, 633 F.2d 123 (9th Cir. 1980), decided today. Here, a limited partnership was formed to become the successor to a corporate Medicare provider. The limited partner obtained the corporation's assets, including goodwill, by a 100 percent stock purchase and subsequent corporate dissolution. The limited partner then contributed these assets to the partnership. Memorial, Inc., dba Memorial Hospital of Panorama City (MHPC), the successor in interest to the limited partnership, claimed the goodwill in stepping up its basis for purposes of Medicare reimbursement claims. MHPC's claims based on this stepped-up basis were denied by the fiscal intermediary and, on appeal, by the Provider Reimbursement Review Board (PRRB or Board). MHPC then sought judicial review in the District Court for the Central District of California. The District Court reversed the decision of the Board, and ordered the Government to cease withholding payments based on these claims. The Court's order covered MHPC's cost reporting year ended in 1973, which had been before the Board, as well as claims for post-1973 cost report years. Petitions for review of pre-1973 cost report year disputes were transferred to the Court of Claims. The Government appeals the judgment and order of the District Court.
We have determined that the findings and conclusions of the Board are not supported by substantial evidence, and accordingly we affirm the District Court's reversal of the Board's decision. We also affirm the transfer of the pre-1973 years' claims to the Court of Claims. The District Court, however, exceeded its jurisdiction in extending its order to years not before it, and we vacate that portion of the Court's order. Finally, the District Court should not have required a specific formula for the calculation of goodwill, and that portion of its judgment is modified. Affirmed in part as modified, vacated in part, and remanded.
As in Pacific Coast, this case arises under the Medicare provisions of the Social Security Act. 1 The facts of this action are not in dispute. Prior to September 30, 1968, there existed a corporate Medicare provider known as Memorial Hospital of Panorama City, Inc. 2 (the corporation). This corporation operated a 96 bed proprietary hospital by leasing the land, the building, and a major portion of the equipment from a general partnership known as Panorama Hospital Associates (PHA).
On August 14, 1968, a limited partnership was formed composed of one Robert M. Bernstein as general partner and a non-profit corporation called Order of Saint Paul The Pauline Fathers First Hermit (hereinafter OSP) as a limited partner. 3 During the several months prior to September 30, 1968, Mr. Bernstein engaged in a number of discussions with the corporation and with PHA concerning the purchase of the hospital operation. OSP was interested in the operation as a source of revenues to support its church activities, and had previously engaged in business ventures with Mr. Bernstein. Such ventures in the past had also taken the form of limited partnerships.
The transfer of the hospital operation to the limited partnership was accomplished by the execution of several agreements, all effective on September 30, 1968:
(a) OSP purchased 100 percent of the stock of the corporation for $5,000,000. The agreement required an initial cash payment of $500,000, with the unpaid balance to be paid from the net earnings of the hospital operations according to a specified formula. The unpaid balance was to bear interest at four percent per annum, and the entire balance would be due and owing in any event in 20 years. 4 As provided for in the agreement, with the consent of the seller shareholders, OSP elected to wind up and dissolve the corporation on the stock sale closing date, September 30, 1968, and immediately distributed all assets, liabilities, and operations to itself.
(b) OSP purchased from PHA for $4,000,000 the buildings, land, and other assets PHA had leased to the corporation for the operation of the hospital. 5
(c) OSP transferred to the limited partnership, as OSP's capital contribution, all assets and business interests it received by dissolving the corporation, and all the assets it purchased from PHA. 6 The assets from the corporation had a net book value of $452,866.
On October 1, 1968, the limited partnership commenced operation of the hospital under a new provider agreement with the Secretary. 7 MHPC, plaintiff below and appellee here, is the successor in interest to the limited partnership.
In establishing a value for its equity capital, MHPC has included the goodwill of $4,547,134 obtained in the purchase of the original corporation. 8 MHPC then used this value in determining its Medicare reimbursement claims for return on equity. These claims were denied by the Blue Cross fiscal intermediary, which ruled that the original 100 percent stock purchase and immediate dissolution was not a purchase of assets for purposes of revaluation. This ruling applied a Bureau of Health Insurance policy on this type of transaction as set forth in a document known as the "Wolkstein letter." 9 MHPC appealed this denial, with respect to its 1973 cost reporting year, 10 to the PRRB.
The Board affirmed the refusal to allow MHPC to include the goodwill in its equity capital, but for different reasoning than applied by the intermediary. The Board first determined that each transaction involved in the transfer must be viewed separately: the stock purchase, the dissolution, and the transfer to the limited partnership. It characterized OSP's purchase of stock as an investment, and maintained that after the liquidation and transfer of assets to the limited partnership, the investment should have remained on the books of OSP. The Board found that "this same cost was transformed from a cost of investing in common stock to a cost of investing in a Limited Partnership." The Board also noted that the limited partnership did not assume liability for the purchase price of the stock. Finally, it suggested that there might be no fixed obligation to compensate the sellers of the stock because the repayment schedule was tied to the operating profits and amount of working capital. 11 The Board concluded that MHPC was not entitled to include goodwill in its equity capital. MHPC sought judicial review of the Board's decision.
The decision of the PRRB constitutes the final decision of the Secretary, and the District Court assumed jurisdiction of the 1973 claim under 42 U.S.C. § 1395oo(f). (The Court ruled it did not have jurisdiction over pre-1973 claims.) On cross-motions for summary judgment, the District Court reversed.
Although the Court rejected the interpretations of Medicare law set forth in the Wolkstein letter, 12 it also recognized that the PRRB rested its decision on different grounds. The Court concluded that the acquisition transactions "constituted a purchase of an on-going facility for purposes of establishing a cost basis for a facility pursuant to 20 C.F.R. § 405.415(g) (now 42 C.F.R. § 405.415(g))." The Court also concluded that "(t)here is no evidence of self-dealing or other conduct that would make the Panorama Hospital acquisition less than the result of a bona fide negotiation," and no party here has challenged this conclusion.
Accordingly, the District Court reversed the Secretary's decision and remanded to the intermediary for a determination of the exact amount owed for the 1973 cost year in conformity with the Court's findings and conclusions. The Court had previously established the formula for calculating goodwill as "the entire excess of the amount of consideration paid for Panorama Hospital over the fair market value of the tangible assets of Panorama Hospital . . .." Finally, the Court ruled that MHPC is entitled to include the goodwill in its equity capital for future cost reports, and the Court permanently enjoined the defendants "from denying plaintiff said reimbursement for any of the reasons at issue herein."
Both parties filed for reconsideration. On June 14, 1978, the District Court granted plaintiff's cross-motion to transfer its pre-1973 claims to the Court of Claims, and denied the Secretary's motion in all respects. The Secretary has appealed the judgment below to this Court. Our jurisdiction is found in 28 U.S.C. § 1291.
As in Pacific Coast judicial review of the PRRB decision is governed by the Administrative Procedure Act (APA). 13 Unlike the Secretary's decision in Pacific Coast, the PRRB disclaimed reliance upon the principles set forth in the Wolkstein letter. As a result, we are not here concerned with a question of statutory interpretation, but rather are presented with a question of sufficiency of the evidence underlying the Board's conclusion. Of course, we must still correct any misapplications of law by the PRRB.
Our standard of review is different from that applied in Pacific Coast. Unlike the Secretary's action there, the PRRB proceedings and decision were required to be "on the record," 42 U.S.C. § 1395oo(d). When a court reviews findings made on a hearing record, the...
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