U.S. v. Pisani

• Decision Date: 20 April 1981
• Docket Number: No. 80-2088,80-2088
• Citation: 646 F.2d 83
• Parties: UNITED STATES of America v. Anthony J. PISANI, M.D., Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 83

646 F.2d 83

UNITED STATES of America v. Anthony J. PISANI, M.D., Appellant.

No. 80-2088.

United States Court of Appeals, Third Circuit.

Argued Jan. 20, 1981.

Decided April 20, 1981.

Dennis A. Drazin (argued), Drazin & Warshaw, Red Bank, N. J., for appellant.

William W. Robertson, U. S. Atty., Robert J. Del Tufo, Maryanne Desmond, Robert Beller (argued), Asst. U. S. Attys., Newark, N. J., for appellee.

Before GIBBONS, VAN DUSEN and WEIS, Circuit Judges.

OPINION OF THE COURT

VAN DUSEN, Senior Circuit Judge.

Defendant Dr. Anthony J. Pisani appeals from a judgment for $151,413. which the district court entered against him after a trial without a jury. The judgment held Pisani personally liable for Medicare overpayments which the former Department of Health, Education and Welfare ("HEW") made to his solely-owned corporation, Eaton Park Associates, Inc. ("corporation"). This court has jurisdiction under 28 U.S.C. § 1291 (1976). We affirm.

I. FACTS

From January 18, 1967, to February 28, 1970, the corporation, doing business as Eaton Park Nursing Home ("Provider"), participated in the Medicare program. During this time, Prudential Insurance Company was the fiscal intermediary between the Provider and HEW, and it supervised the nursing home's financial participation in the Medicare program and advanced interim reimbursements to the home for Medicare services.

Under the Medicare program, an intermediary makes interim payments to providers of services based on their estimated monthly patient costs. To verify these estimates, the providers must submit to the intermediary an annual cost report, verifying their actual costs in caring for Medicare patients. These reports are subject to audit by the intermediary or a subcontracted accounting firm. HEW uses these annual audits to determine if a provider has been overpaid or underpaid by its interim payments.

The Provider (Eaton Park) submitted annual cost reports for 1967, 1968, and 1969. Prudential's accounting firm, Peat, Marwick, Mitchell & Co., could not audit the annual cost reports because Pisani could or would not provide the records it needed to conduct an audit. HEW then surveyed comparable nursing home providers and used the average per diem patient cost of Golden Crest Nursing Home to calculate the Provider's actual costs. The Department believed that Golden Crest was comparable to the Provider. As a result of the survey, HEW determined that $151,413. of the $546,361.25 paid to the Provider for Medicare services was an overpayment. The corporation never repaid the $151,413. since it had no assets. On March 27, 1972, "the corporate entity became void" for failure to pay state taxes. Finding 19, App. 29; Supp.App. 253-54.

Pisani was president, registered agent, and sole stockholder of the corporation during the Provider's participation in the Medicare program. He used personal funds, often obtained through personal bank loans, to finance the corporation. He also loaned money to the corporation. It always operated at a loss, was undercapitalized, and never paid dividends. Pisani kept no corporate minute books and observed no corporate formalities. He testified that all the corporate records were in a briefcase which was stolen from the trunk of his car, but the district court did not believe this testimony. ¹

The June 30, 1967, financial statement for the corporation showed that Pisani had loaned $184,922.67 to the corporation, but its annual cost report for the fiscal year ended June 30, 1969, showed that this debt was reduced from $169,610.60 to zero during that year. Pisani testified that he received $25,000. of a $200,000. personal bank loan, which was secured by all the corporation's stock, and that he received the $25,000. as partial repayment of his loans to the corporation. Supp.App. 149-151. His accountant, Mr. Petrics, testified that $100,000. of the loan was used to repay the corporation's debt to Pisani. Although Pisani repeatedly denied that the loans were repaid, he later admitted that he signed documents showing that the corporation repaid $116,000. to him. Supp.App. 156-58. He knew during the time the corporation repaid his loans that it was on the verge of financial collapse. The nursing home was sold at a foreclosure sale in January 1970 after it defaulted on its mortgage payments.

The district court held Pisani liable for the $151,413. of overpayments as the alter ego of the corporation. It used the cost figures which HEW obtained from Golden Crest, instead of the average cost data for all New Jersey nursing homes. HEW had determined that Golden Crest was a comparable facility. Finally, the court rejected defendant's claim that laches barred the Government's suit. ²

II. DISCUSSION OF LAW

A. Controlling Law: Federal or State

This court must first determine whether federal or New Jersey law controls the issue of Pisani's individual liability for overpayments to the corporation. We hold that federal law applies under Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943). "(F)ederal law governs questions involving the rights of the United States arising under nationwide federal programs." United States v. Kimbell Foods, Inc., 440 U.S. 715, 726, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979). Kimbell Foods stated:

"(T)he priority of liens stemming from federal lending programs must be determined with reference to federal law. The SBA (Small Business Administration) and FHA (Farmers Home Administration) unquestionably perform federal functions within the meaning of Clearfield. Since the agencies derive their authority to effectuate loan transactions from specific Acts of Congress passed in the exercise of a 'constitutional function or power,' Clearfield Trust Co. v. United States, supra, at 366 (63 S.Ct. at 574), their rights, as well, should derive from a federal source In such contexts, federal interests are sufficiently implicated to warrant the protection of federal law."

Id. at 726-27, 99 S.Ct. at 1457-58. Cf. United States v. Yazell, 382 U.S. 341, 357, 86 S.Ct. 500, 509, 15 L.Ed.2d 404 (1966) (not reaching issue whether federal law governed since federal rule would incorporate state rule).

The federal statute which sets guidelines for the Medicare program is the source of the Government's right to recover overpayments. Thus, federal law governs.

In deciding what law to adopt as the federal rule for this case, this court could adopt New Jersey law or fashion a uniform federal rule of decision. See Kimbell Foods, 440 U.S. at 728, 99 S.Ct. at 1458. Several factors are relevant to this choice. First is whether a need for national uniformity exists. Second is the extent to which "a federal rule would disrupt commercial relationships predicated on state law." Id. at 729, 99 S.Ct. at 1459. Finally, and most important here, "we must also determine whether application of state law would frustrate specific objectives of the federal programs. If so, we must fashion special rules solicitous of those federal interests." Id. at 728, 99 S.Ct. at 1458.

We hold that here a uniform federal rule is needed since state law could frustrate specific objectives of the Medicare program. ³ One objective is prompt reimbursements to providers. Interim payments to providers must be made quickly so that they will be encouraged to treat Medicare patients. If HEW did not make prompt payments (including those by intermediaries) because it had to carefully investigate each provider's actual costs and financial condition prior to making payments, many providers might be unwilling or unable to offer Medicare services. To fulfill the goals of the Medicare program, HEW must be able to make prompt payments without the fear that doctors will use corporations with no assets to avoid returning overpayments. As discussed in part II-B below, a court should not permit avoidance of liability for overpayments by a person who is the alter ego of a defunct corporation.

Another specific objective of the Medicare program is that providers of services receive payments only for the reasonable costs of their services. See Monmouth Medical Center v. Harris, 646 F.2d 74 (3d Cir. 1981). ⁴ This goal also makes a uniform federal rule desirable. Return of overpayments is crucial to this goal. If Congress had intended that Medicare be a welfare program for doctors and hospitals, then the return of overpayments would not be so important. The overpayments would be going to those Congress intended to benefit. We believe, however, that Medicare was intended solely to assist patients. The Small Business Administration ("SBA") loans in United States v. Yazell, 382 U.S. 341, 86 S.Ct. 500, 15 L.Ed.2d 404 (1966), and Kimbell Foods went to the parties Congress intended to benefit. Although the United States sued a third party in Kimbell Foods (over conflicting security interests), that third party had loaned money to the recipient of an SBA loan, thus aiding the person Congress intended to help. These cases also held that the Government agency could adequately protect its interests under state law, and thus adopted state law as the federal rule of decision.

Another factor favoring a federal rule is the need for uniformity in the Medicare program. SBA loans are not intended to be uniform nationwide, but the system for Medicare reimbursements is intended to be uniform. Medicare reimbursements are unlike the voluntary SBA loans in Yazell and Kimbell Foods. Yazell incorporated state law because: (1) the loan was individually negotiated and apparently was intended to be governed by Texas law, (2) applying Texas law impaired no substantial federal interest, and (3) no need for national uniformity existed. None of these factors apply to Pisani and his Medicare overpayments. In Yazell, the parties looked at least partially to Texas law when they negotiated the "custom-made, hand-tailored" loan transaction. 382 U.S. at 346, 348, 86 S.Ct. at 503, 504. Pisani,...