Matter of Townview Nursing Home

Decision Date25 February 1983
Docket NumberBankruptcy No. 75 B 1578 (JL).
Citation28 BR 431
PartiesIn the Matter of TOWNVIEW NURSING HOME, Debtor. TOWNVIEW NURSING HOME?€”DEBTOR-IN-POSSESSION, Plaintiff, v. The STATE OF NEW YORK and the City of New York, Human Resources Administration, Defendants. The STATE OF NEW YORK, Third Party Plaintiff, v. Morris GOLDSMITH, Jean Melnick Sternberg, Lucille Feldman Neis and Estate of Robert Mancus with Bess Mancus as Executrix thereof, individually and as partners doing business as Townview Nursing Home, Defendants.
CourtU.S. Bankruptcy Court — Southern District of New York





Charles J. Hynes, Deputy Atty. Gen., New York City, for State of N.Y.; Mary Ellen Bliss, Sp. Asst. Atty. Gen., New York City, of counsel.

Pinks, Feldman & Brooks, Melville, N.Y., for Townview Nursing Home; Steven G. Pinks, Melville, N.Y., of counsel.


JOEL LEWITTES, Bankruptcy Judge.

In February of 1977, Townview Nursing Home ("Townview" or "the Debtor") instituted this adversary proceeding against the City of New York ("The City"). In its complaint, Townview alleged that it had filed a petition, in this Court, to effect an arrangement pursuant to the provisions of Chapter XI of the Bankruptcy Act of 1898, since repealed, on September 9, 1975. Subsequent to the filing of its petition, alleged Townview, it provided an extended care facility (nursing home) to numerous recipients of public assistance. During the period September 9, 1975 to December 31, 1975, Townview alleged that it had rendered services to nursing home patients, at the City's request and for the account of the City. Townview also alleged that it billed the City for these services in the sum of $230,505.39 and received $122,600.00, leaving a balance due of $107,905.39. Although Townview, allegedly, timely demanded the latter amount, no payment had been made as of the filing of its complaint.

The City responded, on March 28, 1977, by a Motion to Abstain. In an accompanying affidavit, the City alleged that this Court was without jurisdiction to hear Townview's complaint. In support of this allegation, the City described for this Court the procedure involved in paying nursing homes for services rendered to recipients of public assistance.

Townview, this Court was told, participated in the Federal Medicaid program. 42 U.S.C. Sec. 1396, et seq., (1976). Section 1396 of the Medicaid Act authorizes appropriations to be made for each fiscal year. The sums appropriated under this section are made payable to States whose plans for medical assistance have been submitted and approved by the Secretary of Health and Human Services (formerly, Secretary of Health, Education and Welfare). Section 1396a establishes the parameters for such plans. Under that section, it is clear that procedure and methods for reimbursement are a State's responsibility. See, Rhode Island Hospital v. Califano, 447 F.Supp. 703, 710 (D.R.I.1978).

The State of New York moves this Court for summary judgment pursuant to Federal Rule of Civil Procedure 56 and Bankruptcy Rule 756, 411 U.S. 1084, as to its first counterclaim-cause of action. Its motion would require this Court to determine the correctness of four audit reports, covering the years 1970, 1971, 1972 and 1973. In large part, we grant the State of New York's motion for summary judgment, but we also deny the motion as to several audit items.

Article 28 of the New York Public Health Law established the procedures and methods for reimbursement to eligible facilities providing care to Medicaid recipients. New York Public Health Law Section 2807 (McKinney's 1982). Rates of reimbursement, in New York, are promulgated on a prospective basis. Per diem rates of care for nursing homes are set by the Department of Health based upon financial reports submitted by a medical facility, such as Townview. 42 U.S.C. Sec. 1396a(a)(30); New York Social Services Law Sec. 363, et seq. (McKinney's 1982); New York Public Health Law Secs. 2805, 2807 (McKinney's 1982); 10 N.Y.C.R.R. Sec. 86 (repealer effective September 30, 1976).1 The allowable costs of a base year are adjusted to take into account inflationary factors and applied to a rate year, two years subsequent to the base year, subject to field audit of the books and records of a facility. Actual payment of Medicaid funds, which consist partially of federal and partially of state monies, is made by a Social Service District of the City, after computation and approval of the rate of reimbursement by the Department of Health, a State agency. Where the result of an audit is retroactively to increase the reimbursement rate, the City pays the additional funds to the facility. Where the result is a decrease in the rate, the City recovers the funds. If a facility questions the result of a field audit, it must request and participate in an administrative hearing.

In an affidavit in support of its Motion to Abstain, the City alleged that Townview had been audited and that the audit disclosed an overpayment to Townview equal to $348,886.00. Since the City would seek reimbursement of this amount, making Townview's claim against the City only a partial offset against this over-payment, and because Townview likely would question the result of this audit and, in order to question the audit, Townview would be required to participate in an administrative hearing, the City concluded that this Court was without jurisdiction to adjudicate Townview's claim against the City. This Court never decided the City's motion.

On August 10, 1978, the City brought an order to show cause why the State of New York should not be joined as an indispensible party pursuant to Federal Rule of Civil Procedure 21 and Bankruptcy Rule 721. The order to show cause also was not decided by this Court, for, in August of 1978, the State of New York ("New York" or "the State") consented to joinder.

On September 28, 1978, the State answered Townview's complaint, raising three affirmative defenses. As a first affirmative defense, New York contended that this Court was without subject matter jurisdiction, alleging that its state agencies have exclusive jurisdiction to determine Medicaid reimbursements. It next raised the Eleventh Amendment as an affirmative defense. Finally, the State contended that it had filed a proof of claim on November 10, 1977 in an amount equal to $340,000.00, based upon overpayments it had made to Townview between July 1, 1971 and December 18, 1975. Townview's complaint amounted to nothing more than an objection to this proof of claim, argued New York, and so should be dismissed.

New York also raised eight counterclaims to Townview's complaint. Moreover, each counterclaim represented a cause of action in the Third-Party complaint New York brought at the same time. Each counterclaim-cause of action prayed for judgment in an amount equal to $348,886.00, based upon its retroactively decreased rate reimbursements engendered by the audit it had performed. Each counterclaim-cause of action rests upon different legal theories.

The first apparently rests upon the State's statutory and regulatory authority retroactively to alter the reimbursement rate as applied to Townview. The State rests, in its second counterclaim-cause of action, upon a theory of "money had and received." The third counterclaim-cause of action alleges a "continuing fraudulent scheme to wrongfully obtain Medicaid reimbursement payments in excess of what they would otherwise have been entitled to obtain." Counterclaim and Third-Party complaint at 10. In its fourth counterclaim and cause of action, New York contends that it has a provable, allowable but non-dischargeable claim against Townview, pursuant to Section 17a, 11 U.S.C. Sec. 35a (repealed). The fifth counterclaim-cause of action contends that money was obtained from the State through negligently, carelessly and recklessly prepared financial reports. The sixth rests upon a theory of conversion of public funds. As a seventh theory, the State alleges that the Third-Party defendants' acts and practices amounted to a breach of fiduciary duty owed to New York. Finally, the State contends that these same acts constitute material breaches of contract, of which New York was a third party beneficiary.

On June 30, 1980, New York moved this Court for summary judgment2 pursuant to Federal Rule of Civil Procedure 56, made applicable to adversary proceedings in this bankruptcy forum through Bankruptcy Rule 756, 411 U.S. 1084 (1973). Townview opposes New York's motion but brings no cross-motion for summary judgment.3


Townview participated in New York's Medicaid program, until December of 1975, when it ceased doing business as a nursing home. It billed the New York City Department of Social Services for services rendered to Medicaid patients for the period July 1, 1971 through December 31, 1975 and was paid according to rates established from annual cost reports submitted by Townview to the New York Department of Health in 1970, 1971, 1972 and 1973.

Medical facilities (a term which, prior to September 30, 1976, included nursing homes) 10 N.Y.C.R.R., Section 86.1 (repealed), by regulation, 10 N.Y.C.R.R. Section 86.3 (repealed), are required to file with New York's Department of Health an annual cost report, known as an HE-2P Report. The Health Department uses information on the HE-2P Report to establish Medicaid per diem rates for a given period. 10 N.Y.C.R.R. Sections 86.2, 86.10.20 (repealed). Medical facilities then bill the appropriate Social Services District for services rendered to Medicaid patients and are paid at the rate established by the Health Department.

Reimbursement rates established by the Department of Health are provisional and subject to alteration following audit of a medical facilities' records and reports. 10 N.Y.C.R.R. Section 86.8 (repealed). If the audit reveals that costs were...

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