In re Family Health Services, Inc., Bankruptcy No. SA89-01549 JW
| Decision Date | 09 June 1989 |
| Docket Number | and No. SA89-02535,SA89-01550 Through SA89-01594,SA89-02536 and SA89-01576 JW.,Bankruptcy No. SA89-01549 JW |
| Citation | 101 BR 636 |
| Parties | In re FAMILY HEALTH SERVICES, INC., et al., Debtors. In re MAXICARE LOUISIANA, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Central District of California |
Peter Wolfson, Myerson & Kuhn, Los Angeles, Cal., for debtors.
Christopher Maisel, Rubinstein & Perry, Los Angeles, Cal., Patrick Cantilo, Admitted Pro Haec Vice, for A.W. Pogue, Commissioner of Ins. for the State of Tex.
James W. Ryals, Milbank, Tweed, Hadley & McCloy, Los Angeles, Cal., for IBJ Schroder Bank & Trust Co.
This matter comes before the Court on the motions of the Attorney General for the State of Louisiana to dismiss or abstain from hearing the petition filed by Maxicare Louisiana, Inc. (Maxicare Louisiana), for relief under Chapter 11 of the Bankruptcy Code. Group Health Association of America filed an amicus curiae brief in support of the motion. The debtor opposed the motion and IBJ Schroeder Bank & Trust Co., a member of the Bondholders Committee, filed a response supporting the debtor's position.
This is one of a number of motions to dismiss filed by state insurance regulators in the Maxicare cases. The first opinion issued by the court was In re Family Health Services, Inc. et al./In re Maxicare North Texas, Inc., 101 B.R. 618 (1989), and much of the court's analysis in that decision is repeated here.
Family Health Services, Inc. and 45 related corporations, including Maxicare Louisiana, filed for relief under Chapter 11 of the Bankruptcy Code on March 15, 1989. Subsequently, two affiliated corporations also filed Chapter 11 petitions. The 48 cases were consolidated for joint administration under Family Health Services, Inc., however, the debtors are commonly and collectively known as "Maxicare." According to the petitions, assets of Maxicare total $2.1 billion and liabilities are $1.4 billion. It appears that there are in excess of 100,000 creditors plus an unknown number of the one million members of Maxicare health plans who may have claims. Maxicare operates a national network of health maintenance organizations (HMOs) which furnish health care services to approximately one million people. Plan members (also called enrollees) pay a fixed monthly fee, usually through their employer, and are eligible for all covered routine and emergency medical services. Hospitals, doctors, and individual health care professionals provide services to plan members under two fee arrangements with Maxicare. A health care provider agrees either to deliver medical care for a fixed monthly charge, a "capitation" fee, or to render services on a fee for service basis.
Maxicare Louisiana is a member of the Maxicare network. At the top of the Maxicare corporate pyramid is Maxicare Health Plans, Inc., a publicly held California corporation. Maxicare Health Plans, Inc. owns 100% of the stock of Maxicare, Inc., a holding company which is also incorporated in California. Maxicare Inc. owns 100% of the stock of Maxicare Louisiana.
Maxicare Louisiana, as an HMO in the Maxicare network, constitutes part of a large integrated and interdependent system for the provision of health care to Maxicare enrollees. Maxicare provides essential operational, administrative and managerial services, as well as centralized budget planning and marketing for the entire network of Maxicare HMOs. (Ruegger Decl. Ex. A., pp. 7-8).
The clearest evidence of the interrelationship between the Maxicare entities is Maxicare's cash management system. Maxicare HMOs transmit daily both bills and funds to Maxicare, Inc., Maxicare's California HMO. Maxicare, in turn, uses the funds received to pay debts as they are incurred throughout the Maxicare network. Maxicare also lends money to Maxicare HMOs, with such transfers being recorded on the books and records of the individual HMOs. Further, Maxicare Louisiana, along with the other Maxicare entities, submits consolidated financial statements reflecting the overall financial health of the Maxicare network. (Ruegger Decl. Ex. A., p. 17).
Maxicare Louisiana is a Louisiana corporation doing business only within that state. HMOs in Louisiana are regulated by the Commissioner of Insurance pursuant to the Health Maintenance Organization Act. La.Rev.Stat.Ann. §§ 22:2001-22:2025 (West Supp.1989). On March 16, 1989, the Commissioner learned of the bankruptcy filing by Maxicare Health Plans, Inc. and filed a Petition to Conserve Assets in the state court. That court issued an order giving the Commissioner control over the bank accounts of Maxicare Louisiana. However, it does not appear that the Commissioner has taken any further action to implement that order pending the outcome of this motion.
This court has jurisdiction pursuant to 28 U.S.C. § 1334(a), (d); 28 U.S.C. § 157(b)(2)(A), (O), and general order No. 266 of the United States District Court for the Central District of California.
The issues are: 1. Is Maxicare Louisiana a "domestic insurance company" and therefore not eligible to be a debtor under sections 109(b)(2) and 109(d) of the Bankruptcy Code? 11 U.S.C. § 109(b)(2), (d).
2. If Maxicare Louisiana is eligible for bankruptcy relief, should this court abstain from hearing its case pursuant to section 305(a)? 11 U.S.C. § 305(a).
Section 109(a) defines who may be a debtor as a person that resides or has a domicile, a place of business, or property in the United States and the term "person" includes individuals, partnerships, and corporations. 11 U.S.C. §§ 109(a), 101(35). The specific exceptions in subsections (b) through (f) of section 109 are the only limits on this broad definition of who maybe a debtor.
The applicable subsections of section 109 provide:
11 U.S.C. § 109(b)(2), (d). Section 109 excludes railroads, domestic insurance companies and banking institutions from eligibility for Chapter 7 relief. In general, to proceed under Chapter 11 an entity must be eligible for Chapter 7 relief.
The Louisiana Attorney General argues that Maxicare Louisiana is a domestic insurance company for section 109 purposes. By comparing and contrasting the Louisiana Health Maintenance Act with other provisions of the Louisiana Insurance Code, the Attorney General contends that Louisiana classifies Maxicare Louisiana as a domestic insurance company. The debtor responds that HMOs in general, and Maxicare Louisiana in particular, are not domestic insurance companies as that term is defined by federal case law and Louisiana regulatory statutes and are, therefore, eligible for Chapter 11 relief.
In determining whether an entity is excluded from seeking bankruptcy relief under section 109, federal courts have followed one or more of several approaches. The process of applying traditional rules of statutory construction has come to be known as the independent classification test. Courts may consider the classification of an entity under state law, thereby applying the state classification test. Finally, at least one court has suggested a third approach and coined the term alternate relief test. This court's analysis of the facts under each of these tests leads to the conclusion that Maxicare Louisiana is not a domestic insurance company and is therefore eligible for Chapter 11 relief.
The independent classification test is based upon the court's own construction of the Bankruptcy Code. 2 Collier On Bankruptcy ¶ 109.02 (15th ed. 1989). The test is essentially statutory construction by another name. In applying the test, courts have adopted a common sense approach guided by legislative history and traditional rules of statutory construction. In re Cash Currency Exchange, Inc., 37 B.R. 617, 621 (D.C.1984), aff'd, 762 F.2d 542 (7th Cir.1985), cert. denied, 474 U.S. 904, 106 S.Ct. 233, 88 L.Ed.2d 232 (1985).
Beginning with the language of section 109, a "domestic insurance company" may not be a debtor under the Bankruptcy Code. 11 U.S.C. § 109(b), (d). The Code neither defines the term, domestic insurance company, nor mentions health maintenance organizations. Absent a definition, courts have applied traditional rules of statutory construction to determine what entities Congress intended to exclude from bankruptcy relief under section 109.
The general rule of statutory construction is that the enumeration of exclusions from the operation of a statute indicates that the statute applies to all cases not specifically excluded. Expressio unius est exclusio alterius. 2A Sutherland Statutory Construction § 47.23 (Sands 4th ed. 1984). As the Seventh Circuit concluded:
If Congress had intended to make the list of excluded entities illustrative rather than exhaustive, it could have used the rule of statutory construction found in the Bankruptcy Code which provides that the words "`includes\' and `including\' are not limiting." 11 U.S.C. § 102(3). Because Congress chose not to do so, we conclude that the list of excluded entities is intended to be exhaustive.
Cash Currency, 762 F.2d at 552.
Section 109 broadly defines who may be a debtor subject to a specific and exhaustive list of exclusions. Congress, in choosing to exempt certain organizations from the operation of the bankruptcy laws, must be presumed to narrowly circumscribe the limits of this exemption. In re Southern Indus. Banking Corp., 59 B.R. 978, 982 (Bankr.E.D.Tenn.1986). Absent affirmative action by Congress to expand the application of this provision, section 109 must be narrowly construed.
Section 109 of the Bankruptcy Code adopted the insurance company...
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