840 F.2d 996 (1st Cir. 1988), 87-1111, WJM, Inc. v. Massachusetts Dept. of Public Welfare

Docket Nº:87-1111.
Citation:840 F.2d 996
Party Name:Medicare&Medicaid Gu 37,008 WJM, INC., etc., et al., Plaintiffs, Appellees, v. MASSACHUSETTS DEPARTMENT OF PUBLIC WELFARE, Defendant, Appellant.
Case Date:February 24, 1988
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

Page 996

840 F.2d 996 (1st Cir. 1988)

Medicare&Medicaid Gu 37,008

WJM, INC., etc., et al., Plaintiffs, Appellees,



No. 87-1111.

United States Court of Appeals, First Circuit

February 24, 1988

Heard Sept. 9, 1987.

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[Copyrighted Material Omitted]

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Despena Fillios Billings, Asst. Atty. Gen., with whom James M. Shannon, Atty. Gen., Boston, Mass., was on brief, for defendant, appellant.

Paul P. Daley with whom Lisa A. Miller and Hale and Dorr, Boston, Mass., were on brief, for plaintiff, appellee Senior Care Associates, Inc.

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Albert F. Cullen, Jr., with whom Cullen & Wall, Boston, Mass., was on brief, for plaintiff, appellee WJM, Inc.

Before CAMPBELL, Chief Judge, GARTH, [*] Senior Circuit Judge, and SELYA, Circuit Judge.


Two nursing homes, after petitioning for bankruptcy, sought to recover from the Massachusetts Department of Public Welfare ("Department" or "DPW") monies they claim were owed to them as reimbursement for expenses incurred in the care of Medicaid patients. The bankruptcy court, 65 B.R. 531, entered a judgment against the Department; the district court affirmed. The Department appeals, raising difficult issues of Eleventh Amendment immunity and bankruptcy law.

We affirm in all respects but the awarding of interest.


Under the Massachusetts Medical Assistance Program, see generally Mass.Gen.Laws ch. 118E (1987), the DPW administers funds appropriated by the federal government and transferred to the commonwealth for the medical care of people who cannot afford to pay for such care themselves, see 42 U.S.C. Secs. 1396 et seq. (1982 & Supp. IV 1986). Health care providers--such as the nursing homes in this case--that serve these needy patients are reimbursed by the DPW for their expenses. The terms of the relationship between the nursing homes and the DPW are spelled out in a "provider agreement" that a home must enter into each year with the DPW. A home promises, inter alia, to maintain certain business records and to comply with applicable state and federal regulations; the Department, in turn, agrees to reimburse the home and to provide it with an opportunity to appeal from a finding of a payment liability, see infra, or termination from the program.

Homes are reimbursed under the provider agreements according to a so-called retrospective payment system. The Department disburses funds to the homes on a monthly basis in accordance with an estimated per diem rate, called the "interim" rate, which is fixed at the beginning of the year by the state Rate Setting Commission ("Commission"), an agency empowered under Mass.Gen.Laws ch. 6A, Sec. 32 (1986). (The Commission bases the interim rate on a home's actual operational costs from the prior year.) At the end of the year, the nursing homes file reports of their actual costs for that year. On the basis of these reports, the Commission determines each home's actual reimbursable costs and establishes the home's "final" rate of reimbursement for that year. If the home's final rate exceeds the interim rate under which it received its monthly payments from the Department, the Department must credit the difference to the facility. Conversely, if the interim rate is greater than the final rate, the home becomes liable to the Department for the "overpayment." (In either case the sum owed is calculated by multiplying the difference in the two rates by the allocable number of "patient days.")

A layer of administrative regulations governs the procedures for the recovery of monies when the two rates diverge. See Mass.Regs.Code tit. 106, Secs. 456.701-704 (1987). The particular subject of controversy in this case is a regulation that allows the Department to deduct, from the amount it owes one home, the amount the Department is owed by a second home that is under common ownership with the first. 1

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The plaintiff-debtors in this case are four Massachusetts corporations engaged in the business of operating nursing homes: Rockview, Inc. (d/b/a Mary Murphy Nursing Home) ("Mary Murphy"); Walter M., Inc. (d/b/a Middlesex Manor Nursing Home) ("Middlesex Manor"); WJM, Inc. (d/b/a Winter Hill Nursing Home) ("Winter Hill"); and Senior Care Associates, Inc. (d/b/a Plainville Nursing Home) ("Plainville"). During the relevant period, each of these four homes was jointly owned by Walter Mikolinski and Anthony Accaputo.

In late 1985, the Commission notified Mary Murphy and Middlesex Manor that they were indebted to the Department in the amounts of $241,547.23 and $208,464.82, respectively, based on revised final rates revealing Medicaid overpayments to Mary Murphy in 1979 and 1980 and to Middlesex Manor in 1980 and 1981. After unsuccessfully making demand upon the homes for the amount of the overpayments, the Department, relying on the regulation described above, offset 2 approximately 15 percent of these liabilities ($69,740.50) against the Department's monthly payments to Plainville and Winter Hill. 3 In early March 1986, within 90 days of these offsets, Winter Hill and Plainville filed voluntary Chapter 11 petitions under the Bankruptcy Code, see 11 U.S.C. Secs. 101 et seq. (1982 & Supp. IV 1986). In fact, by the end of March 1986 all four of the nursing homes had filed for bankruptcy. 4 Since then they have operated as debtors-in-possession.

On March 13, 1986, plaintiffs commenced an adversary proceeding against the DPW seeking, inter alia, to recover the sums withheld by the Department on the ground that the transactions were preferential transfers under 11 U.S.C. Sec. 547 (1982 & Supp. IV 1986). By memorandum and order dated September 16, 1986, the bankruptcy court found that the DPW's offsets were indeed voidable preferential transfers of property belonging to Plainville and Winter Hill. The court ordered the Department to pay $56,646.36 to Winter Hill and $13,094.14 to Plainville. The district court affirmed in a memorandum and order dated December 30, 1986, awarding interest sua sponte.

Important to arguments raised in this appeal are certain proofs of claim filed by two agencies of the Commonwealth of Massachusetts in the nursing homes' Chapter 11 proceedings: 1) between December 1985 and April 1986, the Department of Revenue filed proofs of claim against each home for unpaid taxes; and 2) the Department of Public Welfare filed proofs of claim in at least three of the four homes' bankruptcy proceedings on August 29, 1986, about three months after the completion of the trial in the bankruptcy court of the adversary action against the DPW, but a month before the bankruptcy court had entered judgment. The DPW's claim against each home was for "payments for services rendered to Medicaid recipients ... in excess of the debtor's allowable costs" during all prepetition periods, including those years

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for which the Commission had yet to set final rates.

The Department of Public Welfare raises several issues on appeal. Its first argument is that the Eleventh Amendment barred the relief given to plaintiffs. The Department also makes four arguments under 11 U.S.C. Sec. 547 (1982 & Supp. IV 1986), the section of the Bankruptcy Code covering preferential transfers: first, that the DPW's offsets were not "transfer[s] of property" under section 547; second, that the debtors were not insolvent at the time the transfers were made; third, that the offsets were not voidable transfers under section 547 because they fell under that section's exception for transactions made in the "ordinary course of business," id. at Sec. 547(c)(2); and fourth, that the offsets were in truth "setoffs" under 11 U.S.C. Sec. 553 (1982 & Supp. IV 1986), and thus outside the reach of section 547.

We address these contentions seriatim.


The nursing homes' action against the Massachusetts Department of Public Welfare presents claims of a type that would normally be barred by the Eleventh Amendment. 5 This is to say, their action is for the recovery of an accrued monetary liability and, as the judgment would be satisfied out of the state treasury, the Commonwealth of Massachusetts is the real party in interest. See Edelman v. Jordan, 415 U.S. 651, 663-68, 94 S.Ct. 1347, 1355-58, 39 L.Ed.2d 662 (1974). The nursing homes, however, contend that certain provisions of the Bankruptcy Code--either by themselves or together with actions taken by the commonwealth--effectively remove the bar otherwise imposed by the Eleventh Amendment.

  1. Abrogation

    The argument plaintiffs most vigorously pursue is that section 547(b) of the Bankruptcy Code unequivocally creates a cause of action against a state, thereby abrogating the states' Eleventh Amendment immunity. That provision, when read with two other Code sections, 11 U.S.C. Secs. 101(26), 106(c) (Supp. IV 1986), plainly sets forth a cause of action against a state. Section 547(b) provides that a debtor in possession may bring suit in federal court to "avoid any transfer of an interest in property ... to or for the benefit of a creditor"; section 106(c) provides that "a provision of [the Bankruptcy Code] that contains 'creditor' ... applies to governmental units"; section 101(26) defines "governmental unit" to include both a state and a state agency.

    The difficulty with this argument is that the Supreme Court has yet to indicate whether Congress's power to abrogate--that is, to effectively remove--the states' Eleventh Amendment immunity extends to legislation enacted under Congress's Article I, Sec. 8, power to "establish ... uniform laws on the subject of bankruptcies." In Fitzpatrick v. Bitzer, 427 U.S. 445, 96 S.Ct. 2666, 49 L.Ed.2d 614 (1976), the Court held that the 1972 amendments to Title VII of the Civil Rights Act of 1964, which unambiguously authorized a private suit for compensatory relief against a state,...

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