In re Willington Convalescent Home, Inc., Civ. No. H-84-636 (PCD).
| Decision Date | 08 May 1987 |
| Docket Number | Civ. No. H-84-636 (PCD). |
| Parties | In re WILLINGTON CONVALESCENT HOME, INC., Debtor. STATE OF CONNECTICUT, DEPARTMENT OF INCOME MAINTENANCE and State of Connecticut, Department of Health Services, Defendant/Appellants, v. Martin W. HOFFMAN, Trustee, Plaintiff/Appellee. |
| Court | U.S. District Court — District of Minnesota |
Kenneth A. Graham, Arnold I. Menchel, Asst. Attys. Gen., Hartford, Conn., for Conn. Dept. of Income Maintenance.
Stanley K. Peck, Asst. Atty. Gen., Hartford, Conn., for Conn. Dept. of Health Services.
J. Christopher Kohn, Tracy J. Whitaker, Attys. Civil Div., Dept. of Justice, Washington, D.C., for U.S.
Martin W. Hoffman, Hartford, Conn., trustee.
This is an appeal from a decision by the United States Bankruptcy Court (Krechevsky, J.) denying the State of Connecticut's motion to dismiss a claim against it brought by the trustee of a debtor in a converted Chapter 7 bankruptcy proceeding. See Hoffman v. State of Connecticut (In re Willington Convalescent Home, Inc.), 39 B.R. 781 (Bankr.D.Conn.1984). The State had alleged that no money was owed to the debtor and that it was immune from suit in federal court by virtue of the bankruptcy laws and the eleventh amendment.1
At the outset, appellee trustee raises a threshold objection — in the form of a motion to dismiss2 — as to the propriety of this appeal. Appellee argues that the denial of the original motion to dismiss by the bankruptcy court was interlocutory in nature and not a final order. Plaintiff/Appellee's Memorandum in Support of the Motion to Dismiss ("Appellee's Memorandum") at 2. See Collier on Bankruptcy § 3.03(3) (15th ed. 1984) ("The denial of a motion to dismiss, even when the motion is based on jurisdictional ground, does not ... terminate the action and the order is interlocutory."). Because the ruling was interlocutory, appellee contends that it is appealable only by leave of the district court, as prescribed by Bankruptcy Rule 8001(b)3 and only after the filing of a motion for leave to appeal with the bankruptcy court clerk, as required by Bankruptcy Rule 8003(a).4 Appellants concede they did not file a motion for leave to appeal, but assert no need to do so on the ground that the ruling of the bankruptcy court was final, not interlocutory, and governed, therefore, by Bankruptcy Rule 8001(a),5 which requires merely the filing of a notice of appeal.
Assuming, arguendo, that the ruling of the bankruptcy court was interlocutory, not final, it may still be appealable to this court even in the absence of a motion for leave to appeal. Rule 8003(c) provides:
Appeal Improperly Taken Regarded as a Motion for Leave to Appeal. If a required motion for leave to appeal is not filed, but a notice of appeal is timely filed, the district court ... may grant leave to appeal or direct that a motion for leave to appeal be filed. The district court ... may also deny leave to appeal but in so doing shall consider the notice of appeal as a motion for leave to appeal....
Thus, the Bankruptcy Rules do not focus on the technical distinctions between a motion for leave to appeal and a notice of appeal; indeed, they entrust to the district court discretion to determine whether the questions resolved by the bankruptcy court are or are not appealable.6
Although appellee takes the position that the issues sought to be appealed are not of such a character that they cannot await review following final adjudication on the merits by the bankruptcy court, Appellee's Memorandum at 4-6, the legal and constitutional questions raised by the State of Connecticut implicate the doctrine of sovereign immunity and challenge the propriety of any and all proceedings against the State in the bankruptcy court. Such matters are well to be resolved prior to subjecting the parties to extensive litigation on the merits lest all efforts be found, on appeal, to have been in vain. The delicate balance of our federal system should make federal courts reluctant to require states to defend lawsuits to their conclusion which, arguably, Congress or the Constitution has placed beyond the federal judicial power. Accordingly, appellee's motion to dismiss this appeal is denied.7
Willington Convalescent Home, Inc. ("Willington") formerly operated a nursing home facility which participated in the Connecticut Medicaid Program. Under the program, Willington agreed to provide nursing care services to indigent patients eligible under Title XIX at a specific per diem rate of compensation. The State determined the per diem rate from annual cost reports submitted by Willington.
Initially, the State accepts at face value the cost data submitted by nursing homes such as Willington, but regulations provide for subsequent field audits to verify that the costs claimed are legitimate. If costs are found to have been improperly claimed, the State may adjust the per diem rate retroactive to the applicable rate year and recoup the amount of medicaid overpayment from whatever monthly payments may be due and owing to the facility for current patient care.8 If the nursing home disputes the findings made in the field audit, it may seek an administrative hearing within the Department of Income Maintenance, Conn.Gen.Stat. § 17-311, and then seek judicial review by appeal to the Connecticut Superior Court, Conn.Gen.Stat. § 4-183.
Willington submitted cost reports for the years 1976-1978 which were relied on by the State in setting the per diem Medicaid rates for those years. However, a field audit completed on December 3, 1980, discovered that real property costs claimed as $294,007 were actually only allowable in the amount of $22,500. As a result, Willington had received substantial Medicaid overpayments for five rate-years. On February 24, 1982, the State retroactively revised Willington's per diem rates for 1976 and 1980; on August 6, 1982, the rates for 1977-1979 were also adjusted downward. Willington timely requested review of the latter rate decision, but then moved to postpone the administrative hearing indefinitely. Willington did not appeal the rate decision of February 24, 1982.
On June 2, 1982, Willington filed a Chapter 11 petition in bankruptcy. Willington did not submit its provider agreement to the bankruptcy court for assumption or rejection. Since Willington continued as a provider participant in the Medicaid Program, the Department of Income Maintenance sought to and did recoup a modest amount of the past Medicaid overpayment from the monthly payments due Willington for on-going patient care. Willington shut down permanently in April 1983 still owing the State $121,408. At no time did Connecticut file a proof of claim against the bankrupt estate.
On July 27, 1983, the bankruptcy court converted the case to one under Chapter 7 and appointed a trustee. The trustee filed a complaint against Connecticut seeking payment of $64,010.24 for services provided to Medicaid patients by Willington during March 1983. The State admitted the rendering of the services, but asserted both its right to recoup the prepetition Medicaid overpayments and its insulation from suit on grounds of sovereign immunity and the eleventh amendment. Accordingly, the State moved to dismiss for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted, Fed.R.Civ.P. 12(b)(1) and 12(b)(6), as made applicable to bankruptcy proceedings by Bankruptcy Rule 7012(b). In denying that motion, the bankruptcy court held that: (1) Congress had intended to abrogate the sovereign immunity of a state where, as here, the state owed a matured debt to the bankrupt estate; (2) Congress intended to abrogate the eleventh amendment immunity of a state to suit in federal court in the circumstances at bar; (3) Congress has authority under the Bankruptcy Clause of the Constitution9 to abrogate a state's eleventh amendment and sovereign immunity; and (4) Connecticut owes the estate the payment due for March 1983 because the State may not set off a postpetition obligation to the debtor against a prepetition claim against the debtor.
As the State had challenged the constitutionality of a provision of the Bankruptcy Code (), this appeal was deferred until the Attorney General of the United States was apprised of the challenge and permitted to argue the constitutional question. See 28 U.S.C. § 2403(b).10 The United States has intervened and filed a brief on the constitutional issues.
Resolution of this appeal requires an analysis of the following provision of the Bankruptcy Code:
After noting that the term "governmental unit" is specifically defined in the Code to include a state government,11 the bankruptcy court found the following provision — addressed to an "entity" (and, hence, by virtue of § 106(c), to a state) — applicable to the debt owed by Connecticut for services rendered by Willington in March 1983:
11 U.S.C. § 542(b): An entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to,...
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...and in accordance with the language and legislative history of subsection (a). See Hoffman v. State of Connecticut (In re Willington Convalescent Home, Inc.), 72 B.R. 1002, 1008-1010 (D.Conn.1987). Although the trustee contends in this appeal that the debtor's filing of a petition in bankru......