In re Nuclear Imaging Systems, Inc.

• Decision Date: 18 October 2000
• Docket Number: No. 00-19698F,00-19697F.,00-19698F
• Citation: 260 BR 724
• Parties: In re NUCLEAR IMAGING SYSTEMS, INC., Debtor. In re Cardiovascular Concepts, P.C., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

260 B.R. 724 (2000)

In re NUCLEAR IMAGING SYSTEMS, INC., Debtor In re Cardiovascular Concepts, P.C., Debtor.

Nos. 00-19698F, 00-19697F.

United States Bankruptcy Court, E.D. Pennsylvania.

October 18, 2000.

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Albert A. Ciardi, Jr., Philadelphia, PA, David Kraut, Blue Bell, PA, for debtors.

David B. Aaronson, Michael A. Bloom, Morton R. Branzburg, Andrew C. Kassner, Drinker Biddle & Reath, Laurie A. Krepto, Pepper Hamilton LLP, Christopher R. Momjian, Office of Attorney General, James E. O'Neill, III, Ina S. Weiner, Ronald S. Gellert, Mavis Smith, Philadelphia, PA, Derek J. Allen, Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., Greensboro, NC, Jonathan D. Bennett, Cherry Hill, NJ, Graham D. Guthrie, Thomas R. Merry, Purcell & Scott L.P.A., Dublin, OH, Scott K. Intner, Whiteford Taylor & Preston LLP, Baltimore, MD, Scott R. Lipson, Tallman, Hudders & Sorrentino, P.C., Allentown, PA, Maria K. Pum, San Diego, CA, Linda J. Schwimmer, Lawrenceville, NJ, Ernest B. Thompson, Nashville, TN, David A. Vesel, Raleigh, NC, Robert D. Whaley, Whaley Letteer & Mock, PC, Dallas, TX, for creditors.

Kevin P. Callahan, Philadelphia, PA, trustee.

MEMORANDUM

BRUCE I. FOX, Chief Judge.

The United States has filed a motion to terminate the bankruptcy stay in order to exercise a common law right of setoff.¹ More specifically, the United States seeks relief from the automatic stay in order to setoff the payment to the debtors of certain prepetition receivables due under the Medicare, Champus² and Champva³ programs against the debtor's prepetition federal tax liabilities.⁴ This motion is opposed by a creditor, NPF X, Inc., which asserts a security interest in those prepetition receivables. The debtors do not oppose the relief sought by the United States.⁵

The following facts were proven at an evidentiary hearing held on this motion.

I.

The chapter 11 debtor, Nuclear Imaging Systems, Inc., filed a voluntary petition in bankruptcy on August 4, 2000. This entity provides mobile diagnostic nuclear cardiovascular testing of individuals. The debtor, Cardiovascular Concepts, P.C., also filed for chapter 11 relief on August 4, 2000. This latter entity contracts with managed healthcare providers to have such cardiovascular tests performed, including tests at fixed site locations, and provides some patient review services. Both of these corporate entities are head-quartered in the same location and have similar management. As such, their two cases are being jointly administered at the debtors' request.⁶

Both of these debtors operate in Pennsylvania. One or both of these debtors also operate in various other states. As part of their operations, both entities have been recognized by the Department of Health and Human Services ("HHS") as healthcare providers under the federal Medicare program. See Ex. I-2.⁷

Under Medicare Part B, the Health Care Financing Administration (referred to at the hearing as "HCFA"), a federal agency which oversees Medicare reimbursement for HHS, will pay at a scheduled rate for outpatient services provided by these debtors. The debtors file their claims for reimbursement with a "carrier" who, acting on behalf of HCFA, will evaluate the claim and determine the propriety of payment. If the claim is allowed, the carrier — in Pennsylvania, it is an entity known as HGS Administrators — will then use funds provided by HCFA and deposited in a special bank account to pay the approved claim.

As of September 15, 2000, the debtors have computed their outstanding prepetition Medicare Part B outstanding receivables. Ex. I-3. Recognizing that claims are allowed on the fee schedule only as a percentage of the amount billed the patient, the debtors believe that they are owed a combined total of $780,429.24 from HCFA for the provision of pre-bankruptcy services.

The Internal Revenue Service has filed proofs of claim in both chapter 11 cases. It asserts that Cardiovascular Concepts owes it $984,000.69 as of its bankruptcy filing and Nuclear Imaging Systems owes it $1,337,845.27, also as of August 4, 2000. Exs. I-4, I-5. These obligations stem from unpaid federal taxes beginning with those due March 31, 1999. Exs. I-4, I-5.

On July 31, 1998, Nuclear Imaging signed a secured promissory note with NPF X, Inc. which stated that at that time it was obligated to this creditor in the amount of $6,065,035.10. Ex. A. The collateral is identified in the security agreement as "all accounts receivable now existing and hereafter existing which are created on the records of NIS arising directly or indirectly from the provision of health care services. . . ." Ex. B, at 2 § 4. Cardiovascular also signed a security agreement as "Hypothecator," pledging collateral for this same loan "all accounts receivables now existing and hereafter existing which are created on the records of Hypothecator arising directly or indirectly from the provision of health care services. . . ." Ex. B-1, at 1, § 1.

In this contested matter, NPF X, Inc. asserts that its security interests in the Medicare receivables of both debtors were duly perfected in August, 1998. See Exs. C-1, C-2, C-3, and C-4 (purporting to be copies of duly recorded financing statements). It further asserts that it holds a secured claim in the amount of $5.9 million against both debtors.⁸

After HCFA learned of the debtors' bankruptcy filings, it instructed its Pennsylvania carrier, HGS, to "administratively freeze" all payments to these debtors of Medicare claims arising from the provision of services pre-bankruptcy. See generally Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995). This has resulted in a freeze of $67,101.75 in payments owed to Cardiovascular on prepetition claims. Ex. I-2.

HCFA and the IRS now seek to terminate the bankruptcy stay so that the latter creditor may setoff funds owed to the debtors by the former federal agency. The requested setoff is to be limited, however, solely to prepetition Medicare B receivables. (There was no evidence that the debtors are entitled to payment from either the Champus or Champva programs.) No setoff is requested for receivables created by either debtor after August 3, 2000. See generally Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir.1984) ("pre-petition claims against the debtor cannot be setoff against post-petition debts to the debtor").

NPF X, Inc. opposes such relief on three general bases. First, it maintains that HCFA (or HHS) and IRS are not the same entities, and the debts owing to and from the debtor are not in the same "capacity", thereby precluding HCFA (or HHS) from setoff in favor of the IRS. In addition, NPF X, Inc. argues that setoff should not be permitted for equitable reasons. Last, it maintains that, as a perfected secured creditor in these receivables, its security interest has priority over any setoff rights held by these governmental entities.

II.

A.

The United States seeks to terminate the bankruptcy stay pursuant to 11 U.S.C. § 362(d). Subsection 362(d)(1) states that such relief can be granted for "cause" shown, including a lack of adequate protection for a secured creditor. By virtue of section 506(a), a setoff right gives rise to an allowed secured claim. See, e.g., In re Rehab Project, Inc., 238 B.R. 363, 375 (Bankr.N.D.Ohio 1999) ("Congress bestowed upon creditors having a valid right of setoff, the status of an allowed secured claim, thus giving that creditor the highest priority under the Bankruptcy Code. § 506(a)"); Matter of Olson, 175 B.R. 30, 32 (Bankr.D.Neb.1994); L. King, 4 Collier on Bankruptcy, ¶ 506.031b, at 506-16 (15th ed.rev.1999) ("a claim is a secured claim to the extent of any valid right of setoff").⁹

As a general principle, whether to modify, condition, or annul the bankruptcy stay under section 362(d)(1) is committed to bankruptcy court discretion, see Matter of Holtkamp, 669 F.2d 505 (7th Cir.1982); In re Shariyf, 68 B.R. 604 (E.D.Pa.1986), and is to be determined by examining the totality of the circumstances. Accord Matter of Baptist Medical Center of New York, Inc., 52 B.R. 417, 425 (E.D.N.Y. 1985), aff'd, 781 F.2d 973 (2nd Cir.1986).

While section 362(g) imposes upon the party opposing relief from the stay the burden of proof on all issues other than equity, courts generally have recognized that a party seeking relief from the stay has some initial burden to demonstrate "cause" for relief. E.g., In re Purnell, 92 B.R. 625, 631 (Bankr.E.D.Pa.1988):

Courts in this district have long held that while 11 U.S.C. § 362(g)(2) places the burden of proof upon a debtor, an initial burden of production rests upon a creditor who desires relief from the automatic stay.

See generally In re Ward, 837 F.2d 124, 128 (3d Cir.1988).

Courts have generally concluded that the existence of mutual obligations subject to set-off constitutes sufficient `cause' to meet the creditor's initial evidentiary burden in seeking relief from the automatic stay. Accord In re Orlinski, 140 B.R. 600, 603 (Bankr.S.D.Ga.1991) ("By establishing its right of setoff, the IRS has made a prima facie showing of `cause' for relief from stay under § 362(d)(1)"); In re Coleman, 52 B.R. 1, 3 (Bankr.S.D.Ohio 1985); In re Flanagan Bros., Inc., 47 B.R. 299, 303 (Bankr.D.N.J. 1985).

The burden of persuasion then shifts to the party opposing relief. That burden could be met, inter alia, by demonstrating that the moving creditor has no right of setoff. See In re Freeborn, 100 B.R. 474, 475 (Bankr.E.D.Mo.1989); see also In re Parrish, 75 B.R. 14 (N.D.Tex. 1987) (valid right of setoff constituted "cause" for relief from the stay). The respondent's burden as objector can also be met by demonstrating that the interests of the movant seeking setoff are adequately protected. See In re Carlyle, 242 B.R. 881, 895-96 (Bankr.E.D.Va.1999); Matter of Olson, 175 B.R. at 33.

In the matter at bench, NPF X, Inc. does not suggest that the interests of...