In re WBQ Partnership
| Decision Date | 03 October 1995 |
| Docket Number | Bankruptcy No. 93-10586-AB. Adv. No. 95-1246. |
| Citation | 189 BR 97 |
| Parties | In re WBQ PARTNERSHIP t/a Brookwood Nursing Home, Debtor-in-possession. WBQ PARTNERSHIP, Plaintiff, v. COMMONWEALTH OF VIRGINIA DEPARTMENT OF MEDICAL ASSISTANCE SERVICES, Defendant. |
| Court | U.S. District Court — Virgin Islands, Bankruptcy Division |
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Madeline A. Trainor, Tyler, Bartl, Burke & Albert, P.L.C., Alexandria, VA, for the debtor.
Henry C. Su, Williams, Mullen, Christian & Dobbins, P.C., Richmond, VA, for DMAS.
Robert K. Coulter, Assistant United States Attorney, Alexandria, VA, for the IRS.
MARTIN V.B. BOSTETTER, Chief Judge.
The case at bar presents two questions for decision: whether the Chapter 11 debtor may sell nearly all its assets under 11 U.S.C. § 363(f) before filing a disclosure statement and liquidation plan, and if the sale is permissible under § 363(f), whether the Court can enjoin a creditor of the debtor from initiating a collection action against the third-party buyer. As to the first question, the debtor, WBQ Partnership, has moved to sell virtually all its assets, as part of its decision to liquidate under Chapter 11. Two creditors of the debtor, the Internal Revenue Service ("IRS") and the Virginia Department of Medical Assistance Services ("DMAS"), have objected to the merits of the proposed sale. For the reasons that follow, we overrule these objections, and approve the sale proposed by the debtor.
As to the second question, DMAS contends that it can collect a portion of the gain realized from the sale pursuant to Va.Code Ann. § 32.1-329 (Michie 1992). Significantly, this Virginia statute authorizes DMAS to collect or "recapture" the gain either from the debtor, or if the debtor fails to pay DMAS, from the person buying the assets. By allowing DMAS to proceed against the buyer, we find that the Virginia statute conflicts with § 363(f) of the Bankruptcy Code, which authorizes a trustee to sell property free and clear of liens and other interests. Relying on the Supremacy Clause1 and § 105(a) of the Bankruptcy Code, we permanently enjoin DMAS from exercising its statutory rights against the buyer, as explained more fully below.
The material facts are undisputed. For nearly 20 years, the debtor has operated a nursing home located in Stafford, Virginia, and has received Medicaid payments from DMAS, the state agency responsible for administering the federal Medicaid program in the Commonwealth of Virginia. The Medicaid program provides money to states which, in turn, enables them to fund medical treatment for the poor. See 42 U.S.C. § 1396. To receive Medicaid funding, a state must submit to the U.S. Secretary for Health and Human Services a "plan for medical assistance," id. § 1396a, which is "required to establish, among other things, a scheme for reimbursing health care providers such as nursing homes for the costs of the medical services provided to" Medicaid-qualified patients. Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 502, 110 S.Ct. 2510, 2513, 110 L.Ed.2d 455 (1990).
Among the costs reimbursable under Virginia's plan is the depreciation of a nursing home's tangible assets. Similar to other states, Virginia "calculates depreciation according to a standard accounting method, dividing an asset's purchase price (say, $300,000) by its estimated useful life (say, 30 years), and reimbursing the facility for the resulting annual depreciation ($10,000 each year for 30 years)." Hoodkroft Convalescent Ctr. v. New Hampshire Div. of Human Servs., 879 F.2d 968, 969 (1st Cir.1989) (), cert. denied, 493 U.S. 1020, 110 S.Ct. 720, 107 L.Ed.2d 740 (1990). Upon the sale of the asset, section 32.1-329 of the Virginia Code authorizes DMAS to "recapture" the depreciation it paid "to the extent that the sale price exceeds the depreciated original cost of the asset (i.e., the original purchase price less all depreciation payments made before the sale)." Id. at 969-70 (citing Va.Code Ann. § 32.1-329 (Michie 1988)).
Returning to the illustration supplied in Hoodkroft Convalescent Center, supra, assume that over 15 years, DMAS pays a total reimbursement of $150,000 to the nursing home for the wear-and-tear of the asset. The asset's cost basis is thus reduced to $150,000 ($300,000 less $150,000). Assume further that the nursing home sells the asset to another nursing home for $500,000. Under the Virginia statute, DMAS may recover or "recapture" $150,000 as a depreciation overpayment, as indicated above. Va.Code § 32.1-329(A). If the seller fails to reimburse DMAS for the recaptured depreciation, DMAS will deem the sale "ineffective" as to the Commonwealth of Virginia. At that point, DMAS may collect the recaptured depreciation using "any means available by law." Id. § 32.1-329(C). Such "means" include an action for attachment or levy, and most importantly, exercising a setoff against the Medicaid payments that would be owed to the buyer, as the new owner of the nursing home. See id. § 32.1-329(C) & (D).
The dispute at hand arises from the debtor's motion to sell its nursing home free and clear of DMAS's recapture rights. The nursing-home facility itself is situated on real property owned by Michael and Sherill Quigley, and William and Shirley Bagley. The debtor is a partnership comprised of Michael Quigley and William Bagley, and it owns the personal property connected with the nursing home. On February 11, 1993, the debtor filed for Chapter 11 relief under the Bankruptcy Code. According to the documents filed in this case, three deeds of trust encumber the real property. The first-priority trust secures a total indebtedness of $133,000, while two second-priority trusts secure a total indebtedness of $33,000. Additionally, the IRS asserts a claim totaling $426,834, a portion of which ($260,201) is secured by tax liens.
After filing its Chapter 11 petition, the debtor submitted a proposed disclosure statement and plan of reorganization. DMAS subsequently decreased the level of reimbursement it was paying the debtor, which in turn, reduced the amount of income that the debtor was receiving postpetition.2 According to the debtor, DMAS's action made the plan unconfirmable, and prompted the debtor to withdraw it. In an effort to resolve this Chapter 11 case, the debtor has decided to sell nearly all its assets, and divide the sale proceeds among its creditors pursuant to a liquidation plan that has not yet been filed. The debtor has thus entered into an asset-purchase agreement with Gilron, Inc.3 Under this agreement, which has not yet been approved by the Court, Gilron will buy the real property and the debtor's assets free and clear of liens and other interests, and the liens will attach to the proceeds resulting from the sale. The agreement, as amended, provides that Gilron will pay the purchase price entirely with cash.4 After the sale is completed, Gilron intends to continue operating the facility as a nursing home. The debtor has asked this Court to approve the proposed agreement under 11 U.S.C. § 363(f). Both DMAS and the IRS have objected to the debtor's request.5
Turning to the purchase price, we note that a recent appraisal found the assets' "replacement-cost" value to be $785,000, their "going-concern" value to be $660,000, and their "as is" market value to be $515,000. The proposed agreement originally contemplated that Gilron would pay $700,000 for the assets, a price that exceeded their appraised going-concern value. DMAS subsequently determined, however, that the total amount of reimbursements it would pay to Gilron over time would be $515,000, which represents the "as is" market value of the assets, as mentioned above. DMAS's decision effectively reduced the purchase price to $515,000.6
At this price, DMAS asserts that it is entitled to recapture a total of $196,000 in depreciation overpayments under Va.Code § 32.1-329. It is unlikely that DMAS will recover the entire $196,000 from the proceeds of sale, since DMAS concedes that its right of recapture is not a lien, and since a large portion of the assets already serve as collateral for the secured claims described above. Needless to say, the secured creditors must be paid in full before the unsecured creditors, such as DMAS, can receive their pro rata share of the remaining proceeds. DMAS thus contends that it has authority under Va.Code § 32.1-329 to satisfy any remaining deficiency by exercising its rights against Gilron.
Gilron asserts, and DMAS concedes,7 that should DMAS offset the "recaptured" depreciation against the Medicaid payments owed to Gilron, Gilron would lose the level of income necessary to operate the nursing home efficiently and economically. Accordingly, Gilron is not willing to complete the sale if DMAS is permitted to exercise its rights under Va.Code § 32.1-329. The debtor contends that, if the sale is not consummated, there will be no hope of presenting a confirmable plan, and consequently, the debtor will be forced to either dismiss its case or liquidate under Chapter 7. It is undisputed that either outcome would compel the debtor to close its nursing home, dismiss all its employees, and release all its patients. The debtor asserts that closing the nursing home would impose a significant burden on the patients and their families, for the closest nursing home is twenty miles away, and it has no available beds to accommodate the patients released from the debtor's facility. In the debtor's view, the only available prospect for confirming a plan, and keeping the nursing home open, is to issue an injunction that forbids DMAS from exercising its rights against Gilron. The debtor has thus commenced this adversary proceeding, asking the Court to enjoin DMAS in conjunction with approving the proposed sale. In response, DMAS has moved for summary judgment, or in the alternative, for dismissal of the debtor's complaint on...
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