963 F.2d 1146 (9th Cir. 1991), 90-55621, In re Town & Country Home Nursing Services

Docket Nº:90-55621.
Citation:963 F.2d 1146
Party Name:Soc.Sec.Rep.Ser. 274, In re TOWN & COUNTRY HOME NURSING SERVICES, INC., Debtor. Louis M. SULLIVAN, Secretary of Health and Human Services, Appellant, v. TOWN & COUNTRY HOME NURSING SERVICES, INC., Appellee.
Case Date:December 24, 1991
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 1146

963 F.2d 1146 (9th Cir. 1991)

Soc.Sec.Rep.Ser. 274,


Louis M. SULLIVAN, Secretary of Health and Human Services, Appellant,



No. 90-55621.

United States Court of Appeals, Ninth Circuit

December 24, 1991

Argued and Submitted June 5, 1991.

As Amended May 5, 1992.

Page 1147

Mark B. Stern, United States Dept. of Justice, Washington, D.C., for appellant.

Carl Grumer, Cooper, Epstein & Hurewitz, Beverly Hills, Cal., for appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel.

Before: GOODWIN, PREGERSON and ALARCON, Circuit Judges.

GOODWIN, Circuit Judge:

The Secretary of Health and Human Services appeals the judgment of the Bankruptcy Appellate Panel reversing the bankruptcy court's decision in an adversary proceeding brought by debtor Town & Country Home Nursing Services, Inc. ("T & C"). Because we agree with the BAP that the government waived sovereign immunity under 11 U.S.C. § 106(a) by offsetting against T & C's assets after T & C had filed a Chapter 11 petition, we affirm.


  1. Statutory and Regulatory Background

    T & C is a provider of in-home nursing services under the Medicare Act, 42 U.S.C. §§ 1395-1395ccc. Under the Act, health care providers such as T & C are reimbursed by the government, usually through fiscal intermediaries such as the Blue Cross Association or subcontractors such as Blue

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    Cross of California ("B.C.C."). Congress authorizes the Secretary of Health and Human Services ("the Secretary") to reimburse providers on an interim provisional basis so that any errors resulting in overpayment or underpayment may be corrected. See 42 U.S.C. § 1395g; 42 C.F.R. § 413.60 (1990).

    The intermediary reviews cost reports submitted by the provider and conducts audits when necessary. 42 U.S.C. § 1395h(a). The intermediary then issues a written notice which represents a determination of the total amount of reimbursement due the provider for the fiscal year. 42 C.F.R. § 405.1803. If the final determination is higher than the total of the interim payments, the provider is reimbursed; conversely, if the determination is lower, the provider must refund the overpaid amount to the government. See 42 C.F.R. § 413.64(f).

    If a provider disputes the intermediary's final determination and the amount in controversy exceeds $10,000, the provider can request a hearing before the Provider Reimbursement Review Board within 180 days. 42 U.S.C. § 1395oo (a). The Board's decision may then be reviewed by the Secretary. After exhausting these procedures, the provider may seek judicial review of the final agency decision. 42 U.S.C. § 1395oo (f)(1).

  2. Statement of Facts

    T & C has participated in the Medicare program (Part A) since 1970 and, during the time relevant to this case, B.C.C. served as the fiscal intermediary. In late 1984, B.C.C. asserted that T & C had been overpaid approximately $555,000 for fiscal years 1982 through 1984. To resolve the overpayment dispute, T & C executed a promissory note in the amount of $555,539 in February 1985. The note was made payable to the government and required payment in minimum monthly installments of $16,835 plus interest.

    From November 1984 through September 1985, B.C.C. offset approximately $21,000 per month against provider payments otherwise due and payable to T & C. B.C.C.. then discovered that it had made an error in its calculations and determined that the correct amount of overpayment to T & C had been only about $250,000.

    On July 19, 1985, T & C filed a petition under Chapter 11 of the Bankruptcy Code. After the petition was filed the government, through B.C.C., continued to offset the amount of overpayment to which it claimed it was entitled and ultimately offset the full amount it claimed was owed by T & C. Approximately $88,700 was deducted from provider payments after T & C filed its Chapter 11 petition.

  3. Proceedings Below

    In 1986, T & C initiated an adversary proceeding in bankruptcy court against the Secretary, B.C.C., Blue Cross of America, and the Health Care Financing Administration, the section of the Department of Health and Human Services that administers the Medicare program. As amended, the complaint asserted six claims for relief arising under the Bankruptcy Code and state law. The defendants moved to dismiss for lack of jurisdiction and also moved for judgment on the pleadings.

    The bankruptcy court denied both motions in its order of January 6, 1988. Concerning those claims arising under various sections of the Bankruptcy Code, the court found that the government had waived sovereign immunity under 11 U.S.C. § 106(c). 1 Subsection (c) provides that sovereign immunity is waived for purposes of declaratory and injunctive relief in actions arising under sections of the Bankruptcy Code that contain trigger terms such as "creditor," "entity" or "governmental unit." See United States v. Nordic Village, Inc., --- U.S. ----, ---- - ----, 112 S.Ct. 1011, 1015-16, 117 L.Ed.2d 181 (1992). The waiver of sovereign immunity for actions falling within the scope of section 106(c) does not depend on whether the government has filed a claim in bankruptcy court.

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    With respect to the two state-law claims contained in the fourth and fifth counts of T & C's amended complaint, the bankruptcy court considered whether the government had waived sovereign immunity under 11 U.S.C. § 106(a). This subsection waives immunity for claims of the estate arising out of the same transaction and occurrence as a claim of a governmental unit. The bankruptcy court ruled that sovereign immunity under subsection (a) could be waived even if the government had filed no bankruptcy court claim. Thus, it allowed T & C to proceed with Count IV, which alleged breach of the implied covenant of good faith and fair dealing as well as breach of fiduciary duties, and Count V, which alleged intentional or negligent interference with prospective economic advantage and unfair business practices.

    On reconsideration, the bankruptcy court modified its initial ruling. The court decided that the waiver of sovereign immunity contained in subsection (a) was predicated on the filing of a formal claim by the government. Accordingly, in its order of March 14, 1988, the court held that it lacked jurisdiction with respect to the fourth and fifth counts because the government had not filed a proof of claim in bankruptcy court and therefore had not waived its immunity.

    T & C appealed this dismissal to the Bankruptcy Appellate Panel ("BAP") pursuant to 28 U.S.C. § 158(b), and the BAP reversed. In re Town & Country Home Nursing Servs., 112 B.R. 329 (Bankr. 9th Cir.1990). The BAP found that the actions of the government--specifically its offsetting against T & C's assets after T & C filed its bankruptcy petition--constituted a waiver of sovereign immunity with respect to the state-law claims. Id. at 334. The BAP held alternatively that the government, by its downward adjustment of payments to T & C, had effectively filed an "informal proof of claim" and that this action was sufficient to satisfy the requirements of 11 U.S.C. § 106(a). Id. The BAP further ruled that the exhaustion provisions of the Medicare Act and the Federal Tort Claims Act, 28 U.S.C. §§ 1346(b) and 2671-2680 ("the FTCA"), have no bearing on T & C's claims because of the independent grant of jurisdiction to bankruptcy courts set forth in 28 U.S.C. §§ 157 and 1334, as well as the waiver of sovereign immunity contained in 11 U.S.C. § 106. Id. at 334-35.


    We consider three issues on appeal. First, does the federal government waive sovereign immunity for compulsory counterclaims in bankruptcy court under 11 U.S.C. § 106(a) when it obtains payment from a bankruptcy estate, even though it does not file a formal proof of claim? Second, did the government's self-help collection efforts constitute an informal proof of claim, thereby waiving sovereign immunity? Third, assuming that sovereign immunity was waived, does the bankruptcy court lack jurisdiction because the Medicare Act or Federal Tort Claims Act provides the exclusive remedy for T & C's claims?

    Both parties agree that this appeal presents issues of law subject to de novo review. See In re Taylor, 884 F.2d 478, 481 (9th Cir.1989).

  4. Waiver of Sovereign Immunity

    1. Statutory language

    Section 106 of the Bankruptcy Code provides:

    (a) A governmental unit is deemed to have waived sovereign immunity with respect to any claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which such governmental unit's claim arose.

    (b) There shall be offset...

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