In re Raintree Healthcare Corp.

Decision Date14 December 2005
Docket NumberNo. 03-17195.,03-17195.
Citation431 F.3d 685
PartiesIn re RAINTREE HEALTHCARE CORP., Debtor. Suncrest Healthcare Center LLC, Appellee, v. Omega Healthcare Investors, Inc., Appellant.
CourtU.S. Court of Appeals — Ninth Circuit

Jared G. Parker, John C. Hendricks, and Sarah L. Barnes, Stinson Morrison Hecker L.L.P., Phoenix, AZ, for the appellant.

Scott F. Gibson, Gibson, Ferrin, & Riggs, PLC, Mesa, AZ, for the appellee.

Appeal from the United States District Court for the District of Arizona; Roslyn O. Silver, District Judge, Presiding. D.C. No. CV-03-00238-ROS.

Before: B. FLETCHER, GIBSON,* and BERZON, Circuit Judges.

GIBSON, Senior Circuit Judge:

Omega Healthcare Investors appeals the district court's judgment in favor of Suncrest Healthcare Center. The district court reversed the bankruptcy court's entry of summary judgment in an adversary proceeding brought by Omega to recover Medicare overpayments for cost reimbursements. The district court erred as a matter of law in its interpretation of a written agreement between the principals, and we reverse.


Before February 29, 2000, RainTree Healthcare Corporation leased and operated a nursing home in Phoenix. On February 28, RainTree entered into a Transfer Agreement with Suncrest to transfer operation of the facility and Suncrest began leasing the premises that same day.1 RainTree filed for bankruptcy on February 29. Eight months later, Omega became the owner of the property in RainTree's bankruptcy estate pursuant to a settlement approved by the bankruptcy court. Thus, while Omega is now the real party-in-interest seeking to recover the funds, RainTree is the debtor whose rights and liabilities are at issue.

A nursing home facility must enter into a provider agreement and obtain a Medicare provider number in order to be reimbursed for care given to Medicare patients. RainTree held provider number 03-5205 for the facility at issue. When RainTree transferred operation of the nursing home facility to Suncrest, Suncrest accepted the automatic assignment of that provider number by operation of law. See 42 C.F.R. § 489.18(a)(4), (c) (2000). If Suncrest instead had chosen to apply for a new number, the nursing home could not have participated in the Medicare program while its application was pending. At the time of the transfer in late February, RainTree had outstanding requests for Medicare cost reimbursements.

On or around August 24, 2000, the federal government deposited $184,515.89 in Suncrest's account as the owner of Medicare provider number 03-5205. The deposit represented reimbursement for Medicare payments owed for services rendered in 1998. Although Suncrest held the provider number at the time of the deposit, RainTree had provided the services and was the holder in 1998 of the provider number as the operator of the facility. When Omega became the owner of RainTree's bankruptcy estate, it filed this adversary proceeding in bankruptcy court demanding that Suncrest turn over the funds. On June 24, 2002, the bankruptcy court heard argument and issued an oral ruling in favor of Omega on its motion for summary judgment. Suncrest appealed the ruling to the district court and, on October 15, 2003, the district court reversed the judgment and remanded for entry of judgment for Suncrest. Omega appeals the judgment.


We review de novo the district court's judgment in the appeal from the bankruptcy court, and apply the same de novo standard of review the district court used to review the bankruptcy court's summary judgment. Neilson v. United States (In re Olshan), 356 F.3d 1078, 1083 (9th Cir.2004). Summary judgment is to be granted if the pleadings and supporting documents, viewed in the light most favorable to the non-moving party, show that there is no genuine issue as to a material fact and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c).

This case involves a single issue. The question is whether RainTree or Suncrest was entitled to the Medicare reimbursement funds on February 29, 2000, the day RainTree filed for bankruptcy. See Taylor v. Freeland & Kronz, 503 U.S. 638, 642, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992) ("When a debtor files a bankruptcy petition, all of his property becomes property of a bankruptcy estate."). The answer is dependent upon this Court's interpretation of the relevant Medicare statute and of the intent of the parties as reflected in the Transfer Agreement. Although this is a case arising in bankruptcy, the only relevant Bankruptcy Code provision is not dispositive.

Omega claimed that RainTree's bankruptcy estate was entitled to the Medicare payment under 11 U.S.C. § 541(a) (2000),2 which describes what comprises property of the bankruptcy estate. As the bankruptcy court stated, "Under § 541(a). . ., when a debtor files [for] bankruptcy[,] all its property becomes property of a bankruptcy estate. . . . The scope of the [section] is broad and includes all tangible or intangible property. . . . [C]ontingent interests are even property of the estate." However, the statute "merely defines what interests of the debtor are transferred to the estate. It does not address the threshold questions of the existence and scope of the debtor's interest in a given asset. . . . [W]e resolve these questions by reference to nonbankruptcy law." California v. Farmers Markets, Inc., 792 F.2d 1400, 1402 (9th Cir.1986). In this case, questions as to the existence and scope of RainTree's interest in the Medicare payment are resolved by federal Medicare and state contract law.

Both the bankruptcy and district courts relied on a Fifth Circuit case in reaching opposite legal conclusions regarding the impact of federal Medicare law. In United States v. Vernon Home Health, Inc., 21 F.3d 693 (5th Cir.1994), the government brought an action against the purchaser of a Medicare provider's assets seeking repayment of overpaid Medicare cost reimbursements. The company, Vernon II, had purchased the assets of its predecessor (Vernon I), which had received the Medicare overpayments. However, because Vernon II had assumed the Medicare provider number from Vernon I when the former took over operations of the home health care agency, the district court entered judgment finding Vernon II jointly and severally liable with Vernon I for over-payments. Id. at 694.

On appeal, Vernon II argued that it could not be held liable for the overpayments because it assumed no liabilities under the terms of the purchase agreement with Vernon I and Texas state law therefore shielded it from liability. The Fifth Circuit affirmed, holding that the rights of the United States arising under the Medicare program were determined by federal law, which preempted state corporate law. Id. at 696. In reaching that conclusion, the court relied on the same regulatory and statutory provisions at issue in this case. The controlling regulation is 42 C.F.R. § 489.18 (2000). It provides: "The lease of all or part of a provider facility constitutes change of ownership of the leased portion." § 489.18(a)(4).

"When there is a change of ownership as specified in paragraph (a) of this section, the existing provider agreement will automatically be assigned to the new owner." § 489.18(c).

"An assigned agreement is subject to all applicable statutes and regulations and to the terms and conditions under which it was originally issued. . . ." § 489.18(d).

The cumulative effect of these subsections is that Suncrest's lease of the nursing home facility and assumption of the Medicare provider agreement made Suncrest subject to the same statutory and regulatory conditions as RainTree had been. These conditions include provisions for adjustments for over- and underpayments. 42 U.S.C. § 1395g(a) (2000). The relevant language states:

The Secretary shall periodically determine the amount which should be paid under this part to each provider of services with respect to the services furnished by it, and the provider of services shall be paid . . . the amounts so determined, with necessary adjustments on account of previously made overpayments or underpayments. . . .

In Vernon, the government interpreted the regulation and statute to mean that the assignee of a provider agreement is responsible to satisfy overpayments the government had made to the assignor. The Fifth Circuit described the government's interpretation as "eminently reasonable," 21 F.3d at 696, and concluded that Vernon II could have avoided liability had it applied for its own provider number instead of assuming the one held by Vernon I. Taking over the number allowed Vernon II to provide continuous service to and be reimbursed for Medicare patients without waiting for approval of its application. Id.

The district court in the present case concluded that entitlement to reimbursement for underpayments automatically transfers with the provider number just as liabilities for overpayments transferred in Vernon. The district court rejected RainTree's argument that Vernon is limited to cases where the government is bringing an action for reimbursement and held that the government "need not be a party to the action for the liability to exist." The district court provided no case citation or explanation for its conclusion.

The facts in the instant case are distinct from those in Vernon in significant ways. This case represents a dispute between private parties over entitlement to money that the government paid because it had previously underpaid a provider. The government is not a party to this case and thus takes no position. In contrast, Vernon involved a direct dispute between the government and Vernon II, where Vernon II had assumed the Medicare provider number in an asset-only purchase in which Vernon II took on no liabilities. The government advanced a policy argument that suggested a quid pro quo for Vernon II's assumption of the Medicare provider number. Vernon...

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