In re Metropolitan Hosp.

• Decision Date: 23 August 1991
• Docket Number: Bankruptcy No. 89-12542F.,Civ. A. No. 90-1990
• Citation: 131 BR 283
• Parties: In re METROPOLITAN HOSPITAL, Debtor.
• Court: U.S. District Court — Eastern District of Pennsylvania

131 B.R. 283 (1991)

In re METROPOLITAN HOSPITAL, Debtor.

Civ. A. No. 90-1990, Bankruptcy No. 89-12542F.

United States District Court, E.D. Pennsylvania.

August 23, 1991.

COPYRIGHT MATERIAL OMITTED

Robert H. Levin, Adelman Lavine Gold & Levin, Philadelphia, Pa., for debtor.

MEMORANDUM

LUDWIG, District Judge.

The Official Bondholders Creditor's Committee and the Indenture Trustee appeal from the bankruptcy court's order dated February 14, 1990. The order, which granted relief from the automatic stay, permitted the Secretary of Health and Human Services to retain, postpetition, certain payments due for prepetition medicare services.¹

I.

The following facts, as stipulated to by the parties, were summarized by the bankruptcy court:

The debtor, Metropolitan Hospital, operates three discrete hospital facilities. Its current owners purchased what is now known as the Central Division in 1976; the Springfield and Parkview divisions were purchased in 1981. All three hospitals were purchased with the proceeds derived from the issuance of two bond series. The 1976 series has a principal outstanding amount of $4,770,000.00, and the 1981 series has a principal outstanding amount of $54,000,000.00.

The bond financings resulted in the creation of a trust indenture (supplemented in 1981), which in turn created security agreements. Not only are the buildings, furniture, and equipment collateral for the bondholders, but so are the debtor\'s "gross revenues" which include contract rights, insurance proceeds and general intangibles.

The debtor filed a voluntary petition in bankruptcy under chapter 11 on July 11, 1989 and has been operating all three divisions as debtor in possession ever since. As part of various cash collateral orders and stipulations, the secured creditors have received replacement liens in postpetition "gross revenues" generated by the debtor\'s operations.

On June 13, 1966, Metropolitan Hospital (which then consisted of only what is now known as the Central Division) entered into an agreement with the Secretary of Health, Education and Welfare (the department is now known as HHS) to become a provider of services to medicare beneficiaries. On August 26, 1987, and September 8, 1987, the Springfield and Parkview Divisions respectively entered into similar agreements.²

Rather than requiring hospitals to submit bills for services rendered to medicare patients and await their review prior to payment, the medicare program permits hospital providers to be repaid in at least two different ways. One method, utilized by the Central Division, requires that the hospital receive medicare reimbursements on a bi-weekly basis from periodic interim payments.³ These payments are computed by estimating the medicare services the hospital is likely to provide over a fiscal year and its likely costs and expenses in providing those services, based upon the hospital\'s performance in prior years. (There is a process by which these periodic interim payments may be adjusted in midstream.) Because periodic interim payments are only estimates, a reconciliation is needed at the end of each fiscal year to determine the precise amount to which the hospital was entitled. This process requires the hospital to submit a cost report to the "intermediary" (the entity which actually tenders the payments to the hospital—here Independence Blue Cross), which is then audited. As a result of the audit, a determination may be made that the hospital has either been underpaid or overpaid. See 42 U.S.C. § 1395g(a).

The second repayment method was utilized by Springfield and Parkview. A claim for repayment is filed by these hospitals with the intermediary whenever they treat a purportedly covered beneficiary. These claims are then paid without review but are later audited, and the necessary adjustments are then made.⁴ Obviously, both methodologies are designed to provide prompt approximate payments to medicare providers with the expectation that a subsequent review will determine the provider\'s precise entitlement. See generally United States v. Pisani, 646 F.2d 83 (3d Cir.1981).

The debtor\'s fiscal year ends on June 30th. By some procedure at some time (which is not explained in the stipulation), the Secretary of HHS concluded that the debtor had been overpaid $2,561,321.00 for the fiscal years 1985 through 1987. In some manner also unexplained, this overpayment was reduced to $1,889,958.52 on March 16, 1989. The debtor then acknowledged its indebtedness to the Secretary and signed a promissory note to repay this sum, with interest, in monthly installments of $241,440.75.⁵ By June 13, 1989, payments made by the debtor, along with further adjustments by the Secretary, had reduced the indebtedness to $1,165,306.27.

On June 30, 1989, before this bankruptcy case began, the Intermediary determined that the debtor had been underpaid by $726,636.00 for fiscal year 1989 and the debtor agreed that this underpayment could be applied to reduce its debt for the prior years. This reduced the debt to $473,857.20.⁶

A lingering dispute between the Secretary and medicare providers concerning the proper cost allocation for malpractice insurance, a dispute which had its origins in 1979, was resolved in May 1988 when the Secretary forwarded a settlement offer to hospital providers. Metropolitan accepted the settlement in June 1988. However, the recalculation was not concluded until August 1989, after the chapter 11 petition was filed, when it was then determined that the debtor had been underpaid $361,055.00 for malpractice insurance costs incurred prior to fiscal year 1987. This underpayment has been allocated to the three divisions as follows: $171,747.00 to Central; $127,838.00 to Parkview; and $61,470.00 to Springfield.

On August 18, 1989 (again after the debtor\'s bankruptcy filing), the entire $361,055.00 was credited by the Secretary against the $473,953,63 prepetition debt, which left a balance outstanding of $112,898.63. As the debtor was entitled to an early August 1989 periodic interim payment of $479,368.00, the Secretary withheld from that payment $112,898.63 and thus repaid itself its entire prepetition debt.

These postpetition actions were noticed by the debtor and the unsecured creditors\' committee. Under an agreement reached only by these three parties on September 13, 1989 (but not presented for approval to this court), the Secretary consented to repay the debtor the $112,898.63 withheld and to seek court approval for any postpetition recovery of this amount. However, the $361,055.00 malpractice underpayment was retained by the Secretary with the parties agreeing to seek relief from the stay to support this action. Moreover, the debtor and unsecured creditors\' committee agreed to raise no challenge to the Secretary\'s prepetition actions which resulted in a reduction of the debtor\'s medicare overpayment. Finally, the Secretary agreed to hasten the final audit for fiscal year 1988 and to tender any underpayment due the debtor by September 20, 1989.⁷

It is agreed that the $112,899.00 portion of the August 1989 periodic interim payment was returned to the debtor and that HCFA now seeks to recover that same sum from the fiscal year 1988 underpayment due the debtor.

In re Metropolitan Hospital, 110 B.R. 731, 732-34 (Bankr.E.D.Pa.1990).

II.

The Bondholders Committee and the Indenture Trustee contend that their security interests in the payments owed Metropolitan —$361,055 for the malpractice settlement and $112,898.63 for medicare underpayments —are senior to any setoff right of the Secretary. Indenture Trustee's brief at 13.⁸

A.

It is well known that the filing of a Chapter 11 petition imposes an automatic stay. 11 U.S.C. § 362(a). "The stay prohibits creditors from taking any actions, judicial or extra-judicial, outside of the bankruptcy proceeding to recover amounts owed by the debtor. 11 U.S.C. § 362(a)." University Medical Center v. Sullivan, 122 B.R. 919, 925 (E.D.Pa.1990), clarified on denial of reconsideration, 125 B.R. 121 (E.D.Pa.1991). However, a creditor that obtains relief from the stay may set off a prepetition debt owed by the debtor against a prepetition debt owed by the creditor. 11 U.S.C. § 553(a).⁹ See University Medical Center, 122 B.R. at 925.

Setoff, as a federal bankruptcy law concept, applies when a debtor and a creditor have mutual prepetition claims against one another. This equitable doctrine "allows parties that owe mutual debts to state the accounts between them, subtract one from the other and pay only the balance." Matter of Bevill, Bresler & Shulman Asset Mgmt. Corp., 896 F.2d 54, 57 (3d Cir. 1990). "Setoff is commonly viewed as a type of preference permitted by statute. That is, without the provisions of § 553 (and § 506), any attempt to offset a mutual debt between a creditor and a debtor arguably would amount to a preference under § 547 and could, therefore, be avoided." In re Aspen Data Graphics, Inc., 109 B.R. 677, 683 (Bankr.E.D.Pa.1990).

Here, the bankruptcy court concluded that although "a final determination of underpayment was made postpetition, the debtor's claim against the Secretary arose prepetition and is property of the estate under 11 U.S.C. § 541(a)." Metropolitan, 110 B.R. at 737.

The Bankruptcy Code defines "claim" as the "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. § 101(5)(A). See, e.g., In re High Sierra Transport, Inc., 101 B.R. 432, 436-37 (Bankr.M.D.Pa.1989) ("Section 553 does not prohibit setoff of a creditor's claim arising prepetition, unliquidated or unmatured as of the petition date, against a creditor's prepetition liability").¹⁰ See also In re Dartmouth Nursing Home, Inc., 24 B.R. 256, 264 (Bankr.D.Mass.1982), aff'd, 1985 WL 17642 (D.Mass. Sept. 25, 1985) (debts and credits that arose from prepetition activities...