State of Ohio v. Madeline Marie Nursing Homes No. 1 and No. 2

Decision Date29 November 1982
Docket NumberNo. 80-3768,80-3768
PartiesSTATE OF OHIO; Ohio Department of Public Welfare; Auditor of State; Treasurer of State, Plaintiffs-Appellants, v. MADELINE MARIE NURSING HOMES # 1 AND # 2; Phil C. Collins, Defendants- Appellees.
CourtU.S. Court of Appeals — Sixth Circuit

John Hykes, Thomas W. Hess, Patrick V. Kerrigan, Asst. Attys. Gen., Columbus, Ohio, for plaintiffs-appellants.

James P. Edmiston, Cincinnati, Ohio, for defendants-appellees.

Before EDWARDS, Chief Judge, ENGEL, Circuit Judge, and HILLMAN, * District Judge.

ENGEL, Circuit Judge.

In this appeal, the State of Ohio challenges the validity of two orders issued by a bankruptcy judge for the Southern District of Ohio, Western Division, requiring Ohio to reimburse bankrupt Phil C. Collins for monies spent in operating six nursing homes during July and August of 1978. Collins claimed that the monies were due him under the Medicaid program.

The underlying dispute between Collins and the State of Ohio is set out in more detail in a companion opinion issued concurrently, but heard by another panel of this court. In re Madeline Marie Nursing Homes, 694 F.2d 528 (6th Cir.1982). Disagreement stems basically from audits in 1977 and 1978 which Ohio made of Collins' Medicaid accounts covering 1973 and subsequent years, and which resulted in Collins' conviction of seven separate counts of mail fraud in connection with the procurement of Medicaid funds for the year 1973. That conviction was affirmed by this court in United States v. Collins, 596 F.2d 166 (6th Cir.1979) (per curiam). Ohio attempted to terminate Collins' status as a provider of Medicaid services under the Medicaid plan in early 1978, but in February of that year, Collins obtained a preliminary injunction from the Hamilton County Ohio Common Pleas Court enjoining the State of Ohio from terminating his status as a provider of services, at least until proper notice and opportunity for a termination hearing had been accorded him. Collins v. Ohio Dept. of Public Welfare, No. A7800918, prelim. inj. (Ct. of Common Pleas, Hamilton County, Ohio February 17, 1978). 1 This injunction was not officially dissolved until September 12, 1978, when Collins dismissed the action. On July 7, 1978, the Ohio Department of Public Welfare ("ODPW") (the Ohio state agency which administers the Medicaid program) filed a motion for garnishment in the Franklin County Court of Common Pleas stating in the motion that ODPW had reason to believe the Auditor of the State of Ohio had in his possession money due Collins and requesting the state court to issue a writ of garnishment for that money. The Franklin County Court issued the garnishment on July 14, 1978. State of Ohio v. Collins, No. 78CU-07-3177 (Ct. of Common Pleas, Franklin County, Ohio July 14, 1978).

On July 21, 1978, Collins filed two petitions under Chapter XI of the Bankruptcy Act of 1898, 2 11 U.S.C. Sec. 701 et seq. (1976) (repealed 1979), one petition covering two nursing homes held in limited partnership with his wife, and one petition for four nursing homes owned by Collins as sole proprietor. Also, on July 21, Collins filed an application for a turnover order in each Chapter XI proceeding in the bankruptcy court, alleging that Ohio had in its possession checks totaling approximately $45,000.00 which had been written to reimburse Collins for expenses in running his nursing homes. Allegedly, this money was due him as a provider of Medicaid services under separate provider agreements with Ohio covering each nursing home. According to the applications, the checks were withheld pursuant to the pre-judgment attachment proceedings in the Franklin County Common Pleas Court. On the same day that the applications were filed, the bankruptcy judge issued two orders against the State of Ohio directing it to turn over the checks or show cause on July 25 why immediate payment had not been made.

In compliance with the July 21 turnover orders, Ohio sent five state warrants to the bankruptcy court authorizing payment of $43,629.00. In transmitting the warrants to Collins, Assistant Attorney General Patrick V. Kerrigan advised him:

Although these warrants were prepared and processed because of the preliminary injunction in Hamilton County Common Pleas Court Case No. A7800918, the position of the State of Ohio is that no money is due and owing you for Medicaid reimbursement until the matter of past overpayments is settled. I trust you will make every effort to make the necessary adjustments as soon as possible.

App. 38. Ohio did not appeal the July 21 turnover orders.

On August 14, 1978, the bankruptcy judge issued another turnover order directing the State of Ohio to turn over monies which Collins, as a debtor in possession, claimed were due under the Medicaid program to the bankrupt's estate for the month of July, 1978. Technically, therefore, those sums represented an alleged obligation of the State for monies paid out both before and after the date of filing in bankruptcy. In a letter dated August 14, ODPW again asserted its position that Collins was neither owed nor entitled to receive payments under the Medicaid program, for three reasons: (a) Collins had no current provider agreements with the ODPW, the previous agreements having expired and Collins having had a hearing on his termination; 3 (b) Collins had been convicted of a criminal offense relating to the Medicaid program which gave Ohio the right under federal law to refuse to renew the provider program; 4 and finally, (c) Collins had not filed cost reports which were required by regulation as a condition to continued eligibility. 5 The auditor therefore refused to make payments, asserting that to do otherwise could compel him to violate state law. Copies of this letter were also sent to the bankruptcy judge. Four days later on August 18, a hearing was scheduled before the bankruptcy judge. At that time, no witnesses were sworn nor formal arguments made. Instead the matter was handled by a tape-recorded conference between the parties and the judge in chambers. After the conference, the bankruptcy judge issued another turnover order that applied to both Chapter XI proceedings and directed the Auditor of the State of Ohio "to forthwith release sums being held by the Auditor to the debtor-in-possession in the total amount of $39,745.61 ..." In noting objections raised by Ohio to these orders,

In making this order the Court recognizes that there are certain differences between the positions of the State of Ohio and its various agencies and the debtor-in-possession as to whether or not any sums are due.

That controversy, however, being an issue away and apart from the present necessity to operate the nursing homes, shall no doubt be litigated in the proper way at the proper time.

Although Ohio turned over the warrants to Collins as directed, the state also filed a timely notice of appeal of this order to the district court on August 25, 1978.

On September 8, 1978, an assistant attorney general of Ohio wrote to the bankruptcy judge and informed him that the auditor of the State of Ohio would not voluntarily turn over any additional funds: "although I was personally ordered to turn over checks to Mr. Collins the last time, before I had an opportunity to request a stay, I do not expect to turn over any checks this time." Ex. A to Application for Show Cause Order, September 11, 1979. Acting on a further application for a show cause order filed by Collins, the bankruptcy judge again issued a show cause order on September 11, 1978 requiring the auditor and the assistant attorney general to appear and show cause why "payments due for Medicare [sic Medicaid] services rendered to patients by the nursing homes herein for the month of August, 1978 ..." were not turned over. On September 12, 1978, the state court injunction issued by the Hamilton County Common Pleas Court was dissolved when Collins dismissed that action. The state injunction against termination of Collins' provider reimbursement appears therefore to have been in effect up to that date.

On September 18, 1978, at a hearing held on the September 11 show cause order, the Director of the ODPW testified that warrants were not in existence to pay Collins for August and, in fact, the ODPW had not prepared computer tapes to authorize such payment. Counsel for the state further challenged the propriety of the turnover order, observing that "if in fact there is a debt that is due and owing to Mr. Collins by the State of Ohio, it seems to me that this Court has to determine that that debt constitutes an asset and a constructive possession of the debtor in possession. I have not heard that determination and I don't think the court can issue that summarily. I think, again, that we should have a hearing on that question." In response, the bankruptcy judge observed only, "[w]e are here." Trans. 30-31. Notwithstanding this statement, there is nothing in the record to indicate that evidence was presented on the issue whether Ohio had possession of assets belonging to the bankrupt's estate. Evidence did show, however, that the provider agreements with Collins had not been renewed in the spring of 1978. The bankruptcy judge stated that in the absence of such actual provider agreements, he had power to "deem" their existence. Id. at 154. There was also discussion whether alternative beds existed in the Cincinnati area to accommodate the Medicaid patients in Collins' homes if the State of Ohio wished to move them out.

After the hearing, the bankruptcy judge issued an order on September 18, 1978 which "directed the State of Ohio through its various agencies, departments and personalities to pay the Medicare [sic Medicaid] payments to the rest homes involved herein for services for the month of August, 1978. That program shall continue month by month under this order until the court modifies or abolishes it in the same...

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