In re Apf Co.

• Decision Date: 18 December 2001
• Docket Number: Bankruptcy No. 98-1596(PJW).,Adversary No. 00-849(PJW).
• Citation: 274 B.R. 408
• Parties: In re APF CO., et al., Debtors. Joseph A. Pardo, Trustee, et al., Plaintiffs, v. Nylcare Health Plans, Inc., Nylcare Health Plans of the Gulf Coast, Inc., and Nylcare Health Plans of the Southwest, Inc., Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

274 B.R. 408

In re APF CO., et al., Debtors.

Joseph A. Pardo, Trustee, et al., Plaintiffs, v. Nylcare Health Plans, Inc., Nylcare Health Plans of the Gulf Coast, Inc., and Nylcare Health Plans of the Southwest, Inc., Defendants.

Bankruptcy No. 98-1596(PJW).

Adversary No. 00-849(PJW).

United States Bankruptcy Court, D. Delaware.

December 18, 2001.

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William P. Bowden, Christopher S. Sontchi, Ashby & Geddes, Wilmington, DE, Zack A. Clement, Fulbright & Jaworski L.L.P., Houston, TX, for Defendants Nylcare Health Plans of Gulf Coast, Inc. and Nylcare Health Plans of the Southwest, Inc.

Kevin S. Anderson, Eric P. Wilenzik, Elliott Reihner Siedzikowski & Egan, P.C., Blue Bell, PA, McCarter & English, Wilmington, DE, for NYLCare Health Plans, Inc.

Frederick L. Cottrell, Mark D. Collins, Christopher D. Loizides, Richards, Layton & Finger, P.A., Wilmington, DE, for the Plan Administrator.

Elio Batista, Jr., The Bayard Firm, Wilmington, DE, Joseph L. Schwartz, Riker, Danzig, Scherer, Hyland & Perretti, Morristown, NJ, for Trustee of the FPA Creditor Trust.

MEMORANDUM OPINION

PETER J. WALSH, Bankruptcy Judge.

Before the court is the motion (Doc. # 9) of the defendants Texas Gulf Coast HMO, Inc., formerly NYLCare Health Plans of the Gulf Coast, Inc. ("NYLCare Gulf Coast") and Southwest Texas HMO, Inc., formerly NYLCare Health Plans of the Southwest, Inc. ("NYLCare Southwest") to dismiss all nine counts of the complaint filed by plaintiffs Joseph A. Pardo, Trustee of the FPA Creditor Trust ("Trustee") and the Plan Administrator of APF Co., Inc. ("Plan Administrator", together with the Trustee, the "Plaintiffs") against NYLCare Health Plans, Inc. and its wholly owned subsidiaries, NYLCare Gulf Coast and NYLCare Southwest (collectively, the "Defendants" or "NYLCare"). The motion seeks dismissal pursuant to Fed. R. Civ. Proc. 12(b)(6) for failure to state a cause of action. In a separate motion, NYLCare Health Plans, Inc. ("NHP") joined in NYLCare Southwest and NYLCare Gulf Coast's motion to dismiss the nine counts of the complaint and additionally moved to compel the Plaintiffs to provide a more definite statement of the complaint pursuant to Fed. R. Civ. Proc. 12(e). (Doc. # 8). Plaintiffs allege that NYLCare's pre-petition withholding and post-petition failure to turn over the capitation payments due APF Co.,Inc. f/k/a/ FPA Medical Management, Inc. ("FPA") and its affiliates (collectively "the Debtors") under certain medical services agreements are a sanctionable violation of the automatic stay under 11 U.S.C. § 362 and constitute an avoidable preference under 11 U.S.C. § 547(b) and § 550¹. Plaintiffs also request a recovery of an improvement in FPA's insufficiency position under § 553(b), turnover of property of the estate under § 542, and recovery of an unauthorized post-petition transfer under § 549 & § 550. For the reasons discussed below, I will grant NYLCare's motion as to Counts One through Five and Count Eight, but I will deny the motion as to Counts Six, Seven and Nine. I will also deny NHP's motion for a more definite statement.

BACKGROUND

FPA was a national physician practice management company which acquired, organized and managed primary care physician practices that contracted with health maintenance organizations and health insurance plans. It provided medical care services to capitated managed care enrollees and fee-for-service patients and also provided physician management services to hospital emergency departments, urgent care, radiology and correctional facilities. (Complaint ¶ 9.) FPA Medical Group, P.A., FPA Medical Foundation and FPA Medical Group of Texas, A Texas Professional Association (collectively, the "Medical Groups") were affiliates of FPA. According to Plaintiffs, the Medical Groups provided, through their contracted physicians, medical services to NYLCare's health care enrollees within the state of Texas. (Complaint ¶ 10.)

NHP entered into a certain Multi-Site Services Agreement with FPA effective January 1, 1998 (the "Multi-Site Agreement", together with the Service Agreements, hereinafter referenced, the "Agreements"). (Complaint ¶ 15.) Under the terms of the Multi-Site Agreement, regional contracts were entered into between FPA affiliates and NHP affiliates to govern the provision of services at a local level. (Complaint ¶ 16.) NYLCare Gulf Coast entered into two site specific provider agreements; one with FPA Medical Group, P.A. and the other with FPA Medical Foundation (collectively, the "Site Specific Agreements"). (Complaint ¶ 16.) Both agreements had an effective date of January 1, 1998. (Complaint ¶ 16.) NYLCare Gulf Coast had previously entered into an agreement for the provision of health care services to NYLCare's Houston enrollees with HP/AHI Medical Group, Houston, P.A. ("HP/AHI") dated December 1, 1996 (the "AHI Agreement", and together with the Site-Specific Agreements, the "Service Agreements"). (Complaint ¶ 17.) HP/AHI was subsequently acquired and merged into one of the Debtors, FPA Medical Group of Texas, A Texas Professional Association. (Complaint ¶ 17.) Under the Service Agreements, the Medical Groups were to provide certain medical services to NYLCare enrollees in exchange for NYLCare's payment of a monthly fee (the "Capitation Payment") to the Medical Groups. (Complaint ¶ 18.)

Essentially, only two of the monthly Capitation Payments due under the Agreements are relevant to this case: the Capitation Payments due in June and July of 1998. Prior to filing bankruptcy, FPA and some of its affiliates fell behind in their payment obligations to doctors and medical care providers (the "Healthcare Providers") who were rendering services to NYLCare's managed care enrollees. (Complaint ¶ 19.) Consequently, NYLCare gave notice that it would be withholding the June 1998 Capitation Payment in order to make payments directly to the Healthcare Providers. (Complaint ¶¶ 22,23.) NYLCare subsequently withheld the Capitation Payments due in June and July of 1998 (the "Withheld Payments"). (Complaint ¶¶ 22, 23, 24.) Under the terms of the Multi-Site Agreement, NYLCare was obligated to remit Capitation Payments as calculated under the Site-Specific Agreements on the 15th of every month. (Complaint ¶ 21.) Capitation Payments were also due under the AHI Agreement. (Complaint ¶ 21.) While the Complaint does not specify a set monthly date of payments for the AHI Agreement, Plaintiffs plead that the July Capitation Payment of $4,118,875 was due on July 15, 1998 and that Defendants failed to make the July Capitation Payment. (Complaint ¶ 21.); (Pls.' Mem. in Opp'n to Mot. to Dismiss, Doc. # 32 at 5.) According to Plaintiffs, NYLCare withheld both the June Capitation Payment of at least $3,956,706 and the July Capitation Payment of at least $4,118,875. (Complaint ¶¶ 22, 24.)

Each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on various dates during a period from July 19, 1998 through August 7, 1998.² (Complaint ¶ 13.) The petitions for FPA and its affiliates, including the three involved in this adversary proceeding³, were consolidated by order dated July 21, 1998 into one case, In re APF Co., et al. Case No. 98-1596 (PJW).

On May 26, 1999, I entered an order confirming the Debtors' Modified Second Amended Joint Plan of Reorganization (the "Plan"). (In re APF, Co., et al., Case No. 98-1596(PJW), Doc. # 2100 (Originally Doc. # 2097)). Plaintiffs in this proceeding are the Trustee of the FPA Creditor Trust established by the Plan and the Plan Administrator of the Plan.

Plaintiffs commenced this adversary proceeding on July 18, 2000. They seek declaratory relief, compensatory and punitive damages, and costs and attorneys' fees based on NYLCare's withholding of the Capitation Payments for June and July 1998. Specifically, Counts One, Two and Three allege that NYLCare violated §§ 362(a)(3), (a)(6) and (a)(7) and Count Four alleges that these violations were willful. Count Five requests a declaratory judgment pursuant to § 105 and 28 U.S.C. §§ 2201-2202 that NYLCare has waived all rights to the Withheld Payments by its failure to obtain relief from the automatic stay. Plaintiffs also seek to recover all or portions of the Withheld Payments as an improvement in the insufficiency difference under § 553(b), as an unlawful retention of estate property under § 542, as an unauthorized post-petition transfer under § 549 and as a preferential transfer under § 547 in Counts Six, Seven, Eight and Nine, respectively.

NYLCare moves to dismiss the nine counts of the complaint for failure to state a claim upon which relief may be granted under Fed.R.Civ.P. 12(b)(6)⁴. For each count, One through Nine, Defendants argue that the Plaintiffs have not adequately plead that the Debtors had an interest or right in the Withheld Payments. In support of this position, NYLCare alleges that FPA was in material breach of the Agreements, that by the terms of the Agreements, FPA had forfeited its right to the Withheld Payments and that NYLCare was authorized by the Agreements to instead make payments directly to Healthcare Providers. Defendants also argue, as to Counts One through Five, that the June and July Capitation Payments were withheld pre-petition and that the post-petition retention of the Withheld Payments was not a violation of the automatic stay. In addition, Defendants assert that Plaintiffs have not adequately plead pre-petition setoff for Count Three, an improvement in the insufficiency difference for Count Six, that the July Capitation Payment was withheld post-petition for Count Eight or a transfer of specific funds that depleted the estate for Count Nine.

In response, Plaintiffs argue that it is NYLCare's withholding of the July Capitation Payment after the petition date, and NYLCare's retention of the Withheld Payments during the pendency of the case that constitutes a violation of the...