Estate of Medcare HMO, Matter of

• Decision Date: 30 June 1993
• Docket Number: No. 92-3988,92-3988
• Citation: 998 F.2d 436
• Parties: , 29 Collier Bankr.Cas.2d 255, 24 Bankr.Ct.Dec. 822, Bankr. L. Rep. P 75,334 In the Matter of ESTATE OF MEDCARE HMO, Debtor-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 436

998 F.2d 436

62 USLW 2025, 29 Collier Bankr.Cas.2d 255,

24 Bankr.Ct.Dec. 822,

Bankr. L. Rep. P 75,334

In the Matter of ESTATE OF MEDCARE HMO, Debtor-Appellant.

No. 92-3988.

United States Court of Appeals, Seventh Circuit.

Argued April 12, 1993.

Decided June 30, 1993.

Barry B. Gross (argued), C. Yunkis, Cary E. Dunham, Shefsky & Froelich, William F. Dolan, Bickel & Brewer, Chicago, IL, for appellees.

Geoffrey Slaughter, James A. Stempel, Kirkland & Ellis, Pamela S. Hollis, Donald E. Johnson (argued), Kimberly M. Centella, Hollis & Johnson, Chicago, IL, for debtor-appellant.

James H.M. Sprayregen, Geoffrey Slaughter, James A. Stempel, Kirkland & Ellis, Chicago, IL, for amicus curiae Columbus-Cabrini Medical Center and Galen Hosp. Illinois, Inc. dba Humana Hospital--Michael Reese.

Mary Kay McCalla, Wm. Carlisle Herbert, Hopkins & Sutter, Chicago, IL, for amicus curiae Illinois Health Maintenance Organization Guaranty Assn.

William F. Dolan, Chicago, IL, for amicus curiae Loyola University of Chicago.

Before BAUER, Chief Judge, CUDAHY and KANNE, Circuit Judges.

CUDAHY, Circuit Judge.

The issue in this appeal is whether a health maintenance organization (HMO) is a "domestic insurance company" and thus cannot be a debtor under the Bankruptcy Code pursuant to 11 U.S.C. § 109(b)(2) (1988). The district court held that HMOs are insurance companies under Illinois law and dismissed Medcare's petition for chapter 11 relief for lack of subject matter jurisdiction. We affirm.

I.

Medcare is a not-for-profit Illinois corporation licensed and operating since 1985 as an HMO under the Illinois Health Maintenance Organization Act, 215 ILCS 125/1 et seq. (1992) (HMO Act). Its approximately 54,000 enrollees pay a fixed monthly premium, for which Medcare agrees to arrange or provide various corrective and preventative health care services. Medcare, in turn, contracts with thirty-nine independent physician associations (IPAs) and various hospitals for the provision of health care services. It pays a flat monthly fee for each enrollee assigned to each IPA, and a set per diem fee to cover all in-patient hospital costs. Medcare also provides direct care at four clinics staffed by approximately fifteen physicians and twenty nurses.

On June 3, 1992, Medcare filed a voluntary petition for chapter 11 reorganization. The Illinois Director of Insurance (Director) was granted leave to intervene by the bankruptcy court and moved to dismiss the petition because, he argued, Medcare is an insurance company under section 109(b)(2) of the Bankruptcy Code and thus ineligible to be a debtor for purposes of federal bankruptcy relief. After three days of testimony, however, the bankruptcy court ruled orally that Medcare is not an insurance company. It found that under Illinois law, an HMO can be licensed under either the HMO Act or the Illinois Insurance Code, 215 ILCS 5/1 et seq. (1992), and only those licensed under the Insurance Code can sell simple indemnification insurance. Relying on this distinction, the bankruptcy court held that Illinois does not classify all HMOs as insurance companies, but only those licensed under the Insurance Code. Because Medcare is not licensed under the Insurance Code and cannot sell simple indemnification insurance, the court concluded that Medcare is not a "domestic insurance company" for purposes of section 109(b)(2). It also determined that the essential function of an HMO is the delivery of health care services and that, although this is accomplished through indemnification, the indemnification aspect is incidental to the delivery of care.

The Director was granted leave to file an interlocutory appeal pursuant to 28 U.S.C. § 158(a), and the district court reversed. It held that, although section 109(b)(2) does not expressly exclude HMOs from bankruptcy relief, Illinois law classifies HMOs as insurance companies for purposes of liquidation or rehabilitation, and hence Medcare cannot be a debtor under the Code. Selcke v. Medcare HMO, 147 B.R. 895 (N.D.Ill.1992).

II.

Whether an entity is excluded from the protection of the Bankruptcy Code is a question of law, which we review de novo. See In re Cash Currency Exchange, Inc., 762 F.2d 542, 548 (7th Cir.), cert. denied, 474 U.S. 904, 106 S.Ct. 233, 88 L.Ed.2d 232 (1985). Section 109(b)(2) of the Code excludes certain entities from being debtors eligible for bankruptcy relief. It provides:

(b) A person may be a debtor under chapter 7 of this title only if such person is not--

. . . . .

(2) a domestic insurance company....

Under section 109(d), only those eligible for relief under chapter 7 are eligible for relief under chapter 11.

In In re Cash Currency Exchange, we noted that there were two tests that courts have applied for determining whether an entity is excluded pursuant to section 109(b)(2). The first was the state classification test, which looks to the entity's classification under the law of the state in which the entity is incorporated. We indicated that an entity could be excluded under the state classification test in one of two ways:

If state law classifies the entity as one that is specifically excluded from being a debtor under section 109(b)(2), the inquiry generally ends there. If state law does not so classify the entity, the question becomes whether the entity is the substantial equivalent of those in the excluded class.

Id. at 548. The second test courts have employed, we noted, was the independent classification test. Under this test, a court would look to the language of section 109 itself and construe its provisions using techniques of statutory construction. Id. at 551-52.

In Cash Currency, we applied both tests to conclude that a currency exchange was not an excluded entity under section 109(b)(2), and thus was eligible for relief under the Code. We first applied the state classification test and determined that under Illinois law currency exchanges were not classified as, nor were they the substantial equivalent of, an excluded entity--in that case, a bank. We then applied the independent classification test and found that currency exchanges were not expressly excluded under section 109(b)(2).

After our decision in Cash Currency, another test was devised for classifying entities under section 109(b)(2). In In re Republic Trust & Savings Co., 59 B.R. 606, 614 (Bankr.N.D.Okla.1986), the bankruptcy court suggested the "alternative relief test," which emphasizes "congressional intent and factors of practicality and policy" to determine whether, given a state reorganization and liquidation scheme to wind up a particular entity, federal bankruptcy relief would nonetheless be a satisfactory alternative to the state procedure.

The district court in the present case applied the state and independent classification tests and found that each yielded a different conclusion. The court invoked the independent test and concluded that, because HMOs are not expressly excluded in section 109(b)(2), Congress intended HMOs to be debtors under the Code. Applying the state classification test, however, the district court held that Illinois law classifies HMOs as domestic insurance companies, subjecting them to the liquidation and rehabilitation procedures for insurance companies under state law. Moreover, the court buttressed this conclusion by finding HMOs to be the substantial equivalents of domestic insurance companies under Illinois law because they share the essential attribute of insurance companies: risk pooling and indemnification. The district court then impliedly gave precedence to the state classification test and ruled that Medcare is a domestic insurance company.

Medcare contends that the district court mistakenly held the state classification test to be determinative. It asserts that, given the supremacy of federal law and the need for a uniform interpretation of section 109, the independent test should take precedence over the state test. Medcare also argues that, even if the state classification test is controlling, the district court erred in holding that HMOs are necessarily domestic insurance companies under Illinois law.

A.

Courts faced with the issue whether an HMO is an excluded entity under section 109(b)(2) have applied the three tests somewhat erratically. Some courts have relied solely on the state classification test to determine whether an HMO is an insurance company. See In re Michigan Master Health Plan, Inc., 90 B.R. 274 (E.D.Mich.1985) (relying solely on opinion of Michigan Attorney General that HMO was not insurance company), rev'g, 44 B.R. 642 (Bankr.E.D.Mich.1984) (finding HMO to be insurance company under both state and independent test); In re Portland Metro Health, Inc., 15 B.R. 102 (Bankr.D.Or.1981) (HMO held insurance company under Oregon law). Others have applied both the state and independent classification tests with some even utilizing the alternative relief test for good measure. Of these courts, some have placed primary emphasis on the state classification test, see In re Grouphealth Partnership, Inc., 137 B.R. 593 (Bankr.E.D.Pa.1992) (HMO not insurance company under Pennsylvania law given opinion of Pennsylvania Insurance Commission); others have relied principally on the independent test, see In re Family Health Servs., Inc., 101 B.R. 618 (Bankr.C.D.Cal.1989) (Texas affiliate of national HMO network not insurance company) and consolidated cases; ¹ while another did not specify upon which test it ultimately relied, see In re Beacon Health, Inc., 105 B.R. 178 (Bankr.D.N.H.1989) (applying independent test, state classification test (New Hampshire law) and alternative relief test and concluding without elaboration that HMO was insurance company for purposes of section 109). Given this somewhat unpredictable state of the law and the inherent confusion in having three distinct tests for interpreting eligibility for Bankruptcy Code relief, we are compelled to review anew the proper...