In re Yonkers Hamilton Sanitarium Inc.

• Citation: 22 BR 427
• Decision Date: 13 August 1982
• Docket Number: 82 Adv. 6073.,Bankruptcy No. 80 B 20054
• Parties: In re YONKERS HAMILTON SANITARIUM INC., d/b/a Yonkers Professional Hospital, Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

22 B.R. 427 (1982)

In re YONKERS HAMILTON SANITARIUM INC., d/b/a Yonkers Professional Hospital, Debtor.

Bankruptcy No. 80 B 20054, 82 Adv. 6073.

United States Bankruptcy Court, S.D. New York.

August 13, 1982.

Teitelbaum & Gamberg, P.C., New York City, for trustee.

John S. Martin, Jr., U.S. Atty. for the S.D. New York, New York City, for defendants; Stuart M. Bernstein, Asst. U.S. Atty., New York City, of counsel.

HOWARD SCHWARTZBERG, Bankruptcy Judge.

The defendant, the United States of America, Department of Health and Human Services (the government) urges the application of the doctrine of recoupment as a defense to this action by the trustee in bankruptcy of Yonkers Hamilton Sanitarium, Inc., d/b/a Yonkers Professional Hospital, to recover alleged preferential transfers made by the debtor to the government pursuant to an agreement with the government's fiscal intermediary, Blue Cross/Blue Shield of Greater New York, that called for the recapture of Medicare funds already received by the debtor due to an overpayment. The period in question covers the two years prior to the filing of the debtor's voluntary Chapter 11 petition on February 6, 1980. The debtor was unable to effect a reorganization with the result that an order for relief under Chapter 7 of the Bankruptcy Code was entered on May 2, 1980. The plaintiff is the trustee in bankruptcy who was thereafter appointed by the United States Trustee pursuant to § 11 U.S.C. 15701.

The government moved pursuant to F.R.C.P. 12 and Bankruptcy Rule 712 to dismiss the trustee's complaint for failure to state a claim upon which relief can be granted. The trustee cross moved under F.R.C.P. 56 and Bankruptcy Rule 756 for summary judgment. The operative facts are not disputed.

The debtor was a provider of medical services under the Medicare program, Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395, et seq., which benefits persons 65 years of age and older. The program is administered by private fiscal intermediaries, such as the defendant, Blue Cross, pursuant to an agreement with the Secretary of the Department of Health and Human Services, 42 U.S.C. §§ 1395h, 1395u. Blue Cross, as a fiscal intermediary for the government, makes payments to providers of Medicare services, such as the debtor, who have entered into such provider agreements, and is then reimbursed by the government.

The provider agreement did not require or obligate the debtor to provide Medicare services to the insureds but rather provided only that the services would be paid for under the program if and when rendered by the debtor. Pursuant to the provider agreement the debtor, as a provider, agreed not to charge Medicare beneficiaries directly but instead agreed to bill the government for all services rendered to individuals covered by the Medicare program and to receive payment from the government for services provided. 42 U.S.C. § 1395u.

The Medicare program allows for partial interim payments (P.I.P.) to be made to the provider after it renders services. The bi-weekly P.I.P. payments that the debtor received from Blue Cross, the fiscal intermediary, to cover anticipated expenses under the Medicare program, were an approximation of the debtor's costs and expenses under the Medicare program, subject to adjustment after an audit at the close of each fiscal period, when the debtor, as a provider, was required to submit to Blue Cross a cost report for audit purposes. If the audit indicates the existence of an overpayment, the government must reclaim the overpayment from current and future payments to the provider. 42 U.S.C. § 1395g. See also 42 C.F.R. § 405.454(j). The government's regulations also provide that in the event of bankruptcy, any payments to the provider—

"... shall be adjusted by the intermediary, notwithstanding any regulation or program instruction regarding the timing or manner of such adjustments, to a level necessary to insure that no overpayment to the provider is made." 42 C.F.R. § 405.454(k).

The audit for the fiscal period of 1976 and prior years revealed that the debtor had received $534,863.00 in excess of the amount that it was entitled to receive. The debtor was in no position to repay the entire amount immediately. Instead of terminating the P.I.P. method of payment and thereafter requiring the debtor to submit actual billings for Medicare services rendered before further payments would be made, the government and Blue Cross agreed with the debtor to continue the P.I.P. payments. However, the parties agreed that each of the bi-weekly P.I.P. payments was to be reduced by the sum of $10,286.00 until the entire $534,863.00 was repaid. Additionally, the debtor contends that the government froze the debtor's reimbursement rate at the 1977 level, notwithstanding the debtor's notification that its rate should have increased.

The deductions of $10,286.00 from each P.I.P. payment of $113,200.00 commenced in January, 1978 and continued until April 21, 1982, two and one-half months after the debtor filed its Chapter 11 petition on February 6, 1980. During the year preceding the filing of the Chapter 11 petition, the sum of $246,864.00 was deducted from the P.I.P. payments made during that period, of which $72,012.00 was deducted during the 90-day period immediately preceding the filing of the Chapter 11 petition. During the post-petition period from February 6, 1980 to April 21, 1980, an additional sum of $61,716.00 was deducted.

The trustee's complaint asserts three causes of action. The first cause of action seeks to recover $246,864. as an insider preference within the meaning of Code § 547(b)(4)(B). The second cause of action alleges the standard 90-day preference proscribes under Code § 547(b)(4)(A) and seeks to recover $72,012.00 that was deducted during such 90-day period. The third cause of action seeks to recover the $61,716.00 that was deducted during the post-petition period allegedly in violation of the automatic stay imposed under Code § 362(a).

"INSIDER" PREFERENCE

Under Code § 547(b)(4)(B)(i) a trustee in bankruptcy is authorized to avoid a preferential transfer made to an insider during the period from 90 days to one year prior to the filing of the petition for relief. To avoid an insider preference during this period, the trustee must establish that the transferee was an "insider" at the time of the transfer and that the insider had reasonable cause to believe that the debtor was insolvent at the time of the transfer. Both of these elements need not be found in order to avoid an ordinary 90-day preference under Code § 547(b)(4)(A). For the definition of "insider" reference must be made to Code § 101(25). If the debtor is a corporation, an "insider" is defined under subsection (B) as a—

"(i) director of the debtor;

(ii) officer of the debtor;

(iii) person in control of the debtor;"

The trustee in bankruptcy contends that the government and Blue Cross should be regarded as a "person in control of the debtor" for the purpose of meeting the "insider" test. The element of control is apparently based upon the debtor's financial dependence on the revenues it expected to be paid by the government through its fiscal intermediary, Blue Cross, for the debtor's services to Medicare patients.

The debtor's dependence upon the Medicare funds is not the type of "control" envisioned under Code § 101(25)(B) with respect to debtor corporations. The persons who might be expected to control a corporate debtor are its officers, directors and substantial stockholders. Thus, aside from officers and directors, a person is an insider if that person meets the test of an "affiliate" § 101(25)(E) under Code § 101(2)(A) and:

"... directly or indirectly owns, controls, or holds with power to vote, 20 per cent or more of the outstanding voting securities of the debtor ...",

The Legislative History with respect to the definition of "affiliate" reveals that this term is defined primarily for use in the definition of an insider. House Report No. 95-595, 95th Cong. 1st Sess. (1977) 309 U.S. Code Cong. & Admin.News 1978, p. 5787. Hence, a corporate debtor may be influenced by the demands of its major customers or creditors but such influence alone does not constitute the requisite voting control contemplated under Code § 101(25)(B) for purposes of defining a person in control of a corporate debtor who might be regarded as an "insider."

There is a more fundamental reason why neither the government nor Blue Cross may be classified as insiders for the purpose of avoiding alleged transfers within the period from 90 days to one year before the filing of the debtor's Chapter 11 petition. Since the defendants are neither directors nor officers of the debtor corporation, the trustee must establish that they meet the test under Code § 101(25)(B)(iii) of a "person" in control of the corporate debtor. The term "person" is defined under Code § 101(30) to include individuals, partnerships and corporations "but does not include governmental unit." By definition, the government is expressly excluded as a "person" and therefore cannot be viewed as an "insider." The other defendant, Blue Cross, is merely the government's fiscal intermediary or conduit in this case and is derivatively excluded from the definition of "person." The language in 42 C.F.R. § 421.5(b) (1980) states that the fiscal intermediary acts on behalf of the Administrator of the Department of Health and Human Services and the Health Care Financing Administration and that the "Administrator is the real party of interest in any litigation involving the administration of the program." See United States v. Erika, Inc., ___ U.S., ___, 102 S.Ct., 1650, 1653 n. 4, 72 L.Ed.2d 12 (1982).

The trustee's counsel argues that a "governmental unit" is excluded from the definition of "person" only to prevent the mistaken belief that an involuntary bankruptcy case may be commenced against the government and except for this reason, the...