Willington Convalescent Home, Inc., In re
| Decision Date | 15 June 1988 |
| Docket Number | D,Nos. 481,482,s. 481 |
| Parties | , 17 Bankr.Ct.Dec. 1349, Bankr. L. Rep. P 72,387, Medicare&Medicaid Gu 37,168 In re WILLINGTON CONVALESCENT HOME, INC., Debtor. Martin W. HOFFMAN, Trustee, Plaintiff-Appellant, v. STATE OF CONNECTICUT, DEPARTMENT OF INCOME MAINTENANCE and State of Connecticut, Department of Health Services, Defendants-Appellees, United States of America, Intervenor-Appellee. In re Edward ZERA, Debtor. Martin W. HOFFMAN, Trustee, Plaintiff-Appellant, v. STATE OF CONNECTICUT, DEPARTMENT OF REVENUE SERVICES, Defendant-Appellee, United States of America, Intervenor-Appellee. ockets 87-5021, 87-5023. |
| Court | U.S. Court of Appeals — Second Circuit |
Martin W. Hoffman, Trustee, Hartford, Conn., in both cases for plaintiff-appellant.
Kenneth A. Graham, Asst. Connecticut State Atty. Gen., Hartford, Conn. (Joseph I. Lieberman, Connecticut State Atty. Gen., of counsel) for defendants-appellees State Carl J. Schuman, Asst. Connecticut State Atty. Gen., Hartford, Conn. (Joseph I. Lieberman, Connecticut State Atty. Gen., Jonathan L. Ensign, Asst. Atty. Gen., of counsel) for defendant-appellee State of Conn., Dept. of Revenue Services.
of Conn., Dept. of Income Maintenance and Dept. of Health Services.
Tracy J. Whitaker, Atty., U.S. Justice Dept., Washington, D.C. (Richard K. Willard, Asst. U.S. Atty. Gen., J. Christopher Kohn, Atty., U.S. Justice Dept., Washington, D.C., Stanley A. Twardy, Jr., U.S. Atty. D. Conn., Hartford, Conn., of counsel) in both cases for intervenor-appellee.
Before OAKES, NEWMAN and MINER, Circuit Judges.
Plaintiff-appellant Martin W. Hoffman, as trustee for Willington Convalescent Home, Inc. and for Edward Zera in two separate and unrelated Chapter 7 proceedings under the Bankruptcy Code, 11 U.S.C. Sec. 101 et seq. (1982 & Supp. IV 1986) ("the Code"), commenced adversarial proceedings in the United States Bankruptcy Court for the District of Connecticut (Krechevsky, J.) against defendants-appellees State of Connecticut et al. ("Connecticut" or "the state"). The separate complaints sought to recover $64,010.24 for Willington's services under Connecticut's Medicaid Program and to avoid and recover as a preference $2,100.62 collected in back state sales and use taxes owed by Zera. The bankruptcy court allowed the actions over Connecticut's assertion of immunity from suit in the federal courts under the eleventh amendment of the United States Constitution, finding that Congress had abrogated the state's immunity from these actions in Sec. 106 of the Code, 11 U.S.C. Sec. 106(c). 1 On appeal to the United States District Court for the District of Connecticut (Dorsey, J.), the court reversed the bankruptcy court and ordered that the trustee's suits be dismissed as barred by the eleventh amendment. The trustee appeals from these judgments. We affirm.
Willington Convalescent Home, Inc. ("Willington"), a nursing home operator, contracted with the State of Connecticut under its Medicaid Program to admit Medicaid eligible patients at a per diem rate, which the state determined from cost reports that Willington submitted. After Medicaid payments are made, the Connecticut Department of Income Maintenance conducts field audits of the costs claimed and may adjust retroactively a facility's per diem rate and deduct past Medicaid payments, for costs improperly claimed, from present Medicaid payments for current services, see Conn. Agencies Regs. 17-311-53. A field audit of Willington in late 1980 revealed that its claims of $294,007.00 in real property costs were allowable only to the extent of $22,500.00 and that Willington had received Medicaid overpayments for five years. Accordingly, the state revised Willington's per diem rates and began recouping the past overpayments from current payments to Willington. Willington made a timely request for review of the adjustment as to three of the years pursuant to Conn.Gen.Stat. Sec. 17-311. Subsequently, however, Willington moved to postpone indefinitely a hearing on its request.
In 1982, Willington filed for Chapter 11 bankruptcy, but continued operation and participation in the Medicaid program until it closed in April 1983. Willington at no time submitted its Medicaid contract with the state to the bankruptcy court for assumption or rejection. Although Willington still owed $121,408.00 at its closing, the state filed no proof of claim.
After Willington's case was converted to Chapter 7 in July 1983, appellant Hoffman was appointed trustee and commenced an adversarial action--in essence, a turnover proceeding under Sec. 542(b) 2--against the state to recover $64,010.24 for Willington's Medicaid services during March 1983. The state admitted that Willington had rendered these services, but asserted sovereign immunity from the trustee's suit as well as the right to recoup overpayments.
Likewise, Hoffman brought an adversarial proceeding against the Connecticut Revenue Department as trustee in the Chapter 7 case of Edward Zera. Zera owed the state overdue sales and use taxes, a renewal fee and penalties and interest in connection with a business he owned. In September 1983, the Revenue Department issued a tax warrant, which resulted in payment of $2,100.62 to the state.
Zera filed for bankruptcy on October 7, 1983, and Hoffman filed a complaint on January 5, 1984 seeking to avoid the $2,100.62 payment as a preference, see 11 U.S.C. Sec. 547(b), 3 and to recover the monies transferred to the state, see id. Sec. 550(a). The state asserted both sovereign and eleventh amendment immunities from suit, and moved to dismiss the action.
In each case, the bankruptcy court denied Connecticut's motion to dismiss. See Matter of Willington Convalescent Home, Inc., 39 B.R. 781, 792 (Bankr.D.Conn.1984); Matter of Zera, No. 2-83-00754, slip op. at 14 (Bankr.D.Conn. June 8, 1984). Judge Krechevsky concluded that Congress had intended Sec. 106(c) to abrogate the state's eleventh amendment immunity from suit under 11 U.S.C. Secs. 542(b), see Willington, 39 B.R. at 786-88, and 547(b), see Zera, slip op. at 11-14, and had authorized federal courts to hear such suits pursuant to 28 U.S.C. Sec. 1471(b), the Code's former jurisdictional The state appealed from both decisions to the United States District Court for the District of Connecticut. The United States successfully moved to intervene to present argument on the constitutionality of Sec. 106. On appeal, the district court rejected the bankruptcy judge's interpretation of Sec. 106(c) and therefore did not reach the constitutional issue. See In re Willington Convalescent Home, Inc., 72 B.R. 1002, 1012 (D.Conn.1987); In re Zera, 72 B.R. 997, 1002 (D.Conn.1987). Judge Dorsey found that the bankruptcy court's analysis was "premised on a construction of Sec. 106(c) which cannot readily be harmonized with subsections (a) and (b)," Willington, 72 B.R. at 1007. He emphasized that Sec. 106(c) should not be read in isolation from subsections (a) and (b), id. Furthermore, the district court reasoned, since subsections (a) and (b) provide for limited state exposure to compulsory or permissive counterclaims after it has filed a proof of claim against the estate, a broad reading of subsection (c), "permit[ting] suits against the state for retroactive money damages irrespective of whether the state had" filed a proof of claim, would render subsections (a) and (b) "mere surplusage." Id. Judge Dorsey noted that alleged waivers of sovereign immunity "must be strictly construed in favor of the sovereign," id. at 1008, and the court must be " 'certain' " that " 'an unequivocal expression' " of Congress' intent to waive the states' immunity is " 'in the statute itself,' " id. Reviewing "the language and legislative history [of Sec. 106] ... as well as the better reasoned case law," the district court held that Sec. 106(c) was a limited waiver of sovereign immunity that "did not authorize a suit for retrospective money damages against the State of Connecticut," id. at 1012. "Because it is not 'certain' that Congress provided a cause of action against a state" for retrospective monetary relief under Sec. 542(b), id., or Sec. 547(b), see Zera, 72 B.R. at 1002, the bankruptcy court had no jurisdiction in either case to adjudicate the trustee suits. Accordingly, the bankruptcy court's orders were reversed, see Willington, 72 B.R. at 1012; Zera, 72 B.R. at 1002. The trustee's action was dismissed in Willington, 72 B.R. at 1012, and in Zera was remanded to the bankruptcy court for dismissal, 72 B.R. at 1002.
section, 4 Willington, 39 B.R. at 789; Zera, slip op. at 10-11. The bankruptcy court found that the Bankruptcy Clause, U.S. Const., art. I, Sec. 8, cl. 4, empowered Congress to do so. See Willington, 39 B.R. at 789-91; Zera, slip op. at 11
On appeal, trustee Hoffman argues that the bankruptcy court properly held that Congress intended Sec. 106(c) to waive state sovereign and eleventh amendment immunities from suit under Secs. 542(b) and 547(b). We agree with the district court that the waiver of immunity under Sec. 106(c) extends neither to turnover proceedings under Sec. 542(b) nor to actions for the recovery of funds after a preferential transfer is avoided under Sec. 547(b). We therefore affirm in both cases.
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