Ravenwood Healthcare, Inc. v. State of Maryland, Department of Health and Mental

IN THE UNITED STATES BANKRUPTCY COURT
FORT THE DISTRICT OF MARYLAND
In re:
RAVENWOOD HEALTHCARE, INC., * Chapter 11
Debtor in Possession * Case No. 02-5-9516-JS
* * * * * * * * * * * * *
RAVENWOOD HEALTHCARE, INC., *
Plaintiff *
v. * Adv. Pro. No. 04-1383-JS
STATE OF MARYLAND, DEPT. OF *
HEALTH AND MENTAL HYGIENE,
*
Defendant
* * * * * * * * * * * * *
MEMORANDUM OPINION DENYING THE MOTION OF THE STATE OF
MARYLAND TO DISMISS, BUT DISMISSING THE COMPLAINT BY
GRANTING SUMMARY JUDGMENT TO THE STATE OF MARYLAND
Date signed October 12, 2006
Entered: October 16, 2006 Case 04-01383 Doc 63 Filed 10/16/06 Page 1 of 10

On April 26, 2004, Ravenwood filed a line [P. 7] by which it withdrew its1
request for preliminary injunctive relief.
Medicaid is a Federal program that is administered by the State and is funded2
by the Federal and State governments. 42 U.S.C. § 1396a (2); COMAR 10.09.10, et
seq. Ravenwood submits annual reports to the State that detail amounts expended for
patient care and services. Compensation is then made to Ravenwood by the State
2
Before the Court is the complaint filed by the debtor in possession, Ravenwood
Healthcare, Inc. (“Ravenwood”), for injunctive relief and turnover of property of the1
estate against the State of Maryland, Department of Health and Mental Hygiene (“the
State”), together with the motion of the State to dismiss and cross motions for
summary judgment. For the reasons stated, the motion to dismiss will be denied but
the complaint will be dismissed by the granting of the motion of the State for
summary judgment.
FINDINGS OF FACT
Ravenwood is a non-profit corporation that owns and operates a comprehensive
care nursing facility located at 501 West Franklin Street in Baltimore City that
provides 24-hour in-patient care to the elderly patients and other patients who are
either HIV-positive or are afflicted with AIDS. Because a majority of these patients
are indigent or have neither private insurance nor the wherewithal to pay the cost of
long-term health services, Ravenwood depends upon Medicaid reimbursements
through the State of Maryland for its economic existence.2
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based upon a reimbursement formula. 42 U.S.C. § 1396a (2); COMAR 10.09.10.09.
In order for Ravenwood to operate effectively, Ravenwood is permitted to submit
interim reports during the year. 42 U.S.C. § 1396a (2); COMAR 10.09.10.09. In
return, the State supplies a portion of the Medicaid reimbursement. 42 U.S.C. §
1396a (2); COMAR 10.09.10.09. At the end of each year, advances by the State
based upon such interim reports are reconciled. 42 U.S.C. § 1396a (2); COMAR
10.09.10.07.
Since argument was heard on the complaint, the State paid to the debtor the3
sum of $ 495,097.20, leaving in dispute $ 476,312.80.
3
On June 13, 2002, Ravenwood filed a Chapter 11 bankruptcy petition in this
Court. On March 30, 2004, it filed the instant complaint against the State of
Maryland, Department of Health and Mental Hygiene, pursuant to Sections 541, 542
and 550 of the Bankruptcy Code to recover the sum of $ 971,400. The amount is3
alleged to represent sums due Ravenwood for fiscal year ending June 30, 2003, the
amount having been determined by Clifton Gunderson, an accounting firm employed
by the State as its Medicaid audit agent. The complaint stated that the monies were
property of the bankruptcy estate and were wrongfully deducted from Medicaid
payments owed to Ravenwood and withheld by the State as a recoupment of amounts
that Ravenwood owed the State.
The State filed an answer to the complaint [P. 8], and a motion to dismiss [P.
38], both on the ground that the suit is barred by the doctrine of sovereign immunity
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The Eleventh Amendment to the U.S. Constitution provides as follows:4
The judicial power of the United States shall not be construed to
extend to any suit in law or equity, commenced or prosecuted against
one of the United States by Citizens of another State, or by Citizens or
Subjects of any Foreign State.
U.S. Const. Amendment XI.
4
as embodied in the Eleventh Amendment to the U.S. Constitution. The State also4
filed a motion for summary judgment [P. 37] on the ground that it was lawfully
entitled to withhold funds from the debtor as recoupment for overpayments under the
terms of the Medicaid program. Additionally, the State claimed that Ravenwood had
miscalculated the amount due, that Ravenwood had not exhausted its administrative
and State law remedies, and also denied that the State owed any amount to the debtor.
Ravenwood filed its own motion for summary judgment [P. 40].
CONCLUSIONS OF LAW
THE DOCTRINE OF SOVEREIGN IMMUNITY
The instant suit is not barred by the doctrine of sovereign immunity. Earlier
this year, the Supreme Court held in the case of Central Virginia Community College
v. Katz, ___ U.S. ___, 126 S.Ct. 990, 163 L. Ed.2d 945 (2006), that the Eleventh
Amendment was not a bar to a suit brought by a bankruptcy trustee against a State
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For all practical purposes, a Chapter 11 debtor in possession enjoys the same5
status and powers as a trustee in bankruptcy. 11 U.S.C. § 1107.
5
instrumentality to recover an alleged preferential transfer. The instant suit is5
premised upon a traditional bankruptcy cause of action, to wit, the turnover and
recovery of property of the debtor’s bankruptcy estate.
This Court need not address the debtor’s allegation that the State has tacitly
consented to the subject matter jurisdiction of the bankruptcy court by its filing of a
proof of claim and by answering the complaint. Cf. Schlossberg v. Maryland (In re
Creative Goldsmiths of Washington, D.C., Inc.), 119 F.3d 1140 (4th Cir. 1997), cert.
denied, 523 U.S. 1075 (1998). In Creative Goldsmiths, the Fourth Circuit held that
the filing of an answer by the State to a trustee’s complaint to recover an alleged
preference did not amount to a waiver of sovereign immunity nor a consent to the
subject matter jurisdiction of the bankruptcy court, and that the defense could be
raised by the State for the first time on appeal after it had filed an answer to the
complaint and failed to raise the defense on a first-tier appeal to the U.S. District
Court. The opinion further held unconstitutional Section 106 of the Bankruptcy Code
as it purported to abrogate State sovereign immunity. When the Supreme Court
decided Central Virginia Community College v. Katz, supra, it held that Section 106
was superfluous because in ratifying the Constitution, the States ceded their sovereign
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Federal Rule of Civil Procedure 12(b) provides, as follows:6
Rule 12. Defenses and Objections --When and How Presented – By Pleading
or Motion --Motion for Judgment on Pleadings.
(b) How Presented. Every defense, in law or fact, to a claim for
relief in any pleading, whether a claim, counterclaim, cross-claim, or
third-party claim, shall be asserted in the responsive pleading thereto if
one is required, except that the following defenses may at the option of
the pleader be made by motion: (1) lack of jurisdiction over the subject
matter, (2) lack of jurisdiction over the person, (3) improper venue, (4)
insufficiency of process, (5) insufficiency of service of process, (6)
failure to state a claim upon which relief can be granted, (7) failure to
join a party under Rule 19. A motion making any of these defenses shall
be made before pleading if a further pleading is permitted. No defense
or objection is waived by being joined with one or more other defenses
or objections in a responsive pleading or motion. If a pleading sets forth
a claim for relief to which the adverse party is not required to serve a
responsive pleading, the adverse party may assert at the trial any defense
in law or fact to that claim for relief. If, on a motion asserting the
defense numbered (6) to dismiss for failure of the pleading to state a
claim upon which relief can be granted, matters outside the pleading are
presented to and not excluded by the court, the motion shall be treated
as one for summary judgment and disposed of as provided in Rule 56,
and all parties shall be given reasonable opportunity to present all
material made pertinent to such a motion by Rule 56.
Fed.R.Civ.P. 12(b).
6
immunity to the plenary power of Congress to enact uniform bankruptcy laws, set
forth in Article I, Section 8, clause 3.
When ruling on a motion to dismiss filed pursuant to Federal Rule of Civil
Procedure 12(b)(6), the Court accepts as true all well-pleaded allegations in the6
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7
complaint, including all reasonable inferences that may be drawn from them, in the
light most favorable to the plaintiff. Logan v. Becker (In re Inner City Management,
Inc.), 304 B.R. 250, 253 (Bankr. D. Md. 2003), rev’d on other grounds, sub. nom In
re Bogdan, 414 F.3d 507 (4th Cir. 2005), cert. denied, sub. nom. Stewart Title Guar.
Co. v. Logan, ___ U.S. ___, 126 S. Ct. 1052, 163 L. Ed.2d 859 (2006); Liebmann v.
French (In re French), 303 B.R. 774, 777 (Bankr. D. Md. 2003), aff’d, 320 B.R. 78
(D. Md. 2004), 440 F.3d 145 (4th Cir. 2006); Hemelt v. Pontier (In re Pontier), 165
B.R. 797, 798-99 (Bankr. D. Md. 1994). According to this standard, the motion of
the State to dismiss the complaint will be denied.
SUMMARY JUDGMENT WILL BE GRANTED TO THE STATE
The State of Maryland is entitled to summary judgment because (1) this Court
finds that there is no dispute as to any material fact, and that (2) as a matter of law,
pursuant to the Medicaid program, the State of Maryland is entitled to withhold funds
payable to the debtor during the pendency of the bankruptcy case as recoupment for
overpayments, without violating the automatic stay and without the necessity of filing
an adversary proceeding against the debtor for recoupment.
“Recoupment is ‘narrowly construed’ in bankruptcy cases because it violates
the basic bankruptcy principle of equal distribution to creditors.” Conoco, Inc. v.
Styler (In re Peterson Distributing, Inc.), 82 F.3d 956, 959 (10th Cir. 1996), quoted
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8
in In re Adamic, 291 B.R. 175, 182 (Bankr. D. Colo. 2003). However, recoupment
of overpayments by governments in the context of Medicare or Medicaid programs
has been allowed in bankruptcy under the concept that the contract under which
recoupment was had was a “single transaction.” See In re District Memorial Hospital
of Southwestern North Carolina, Inc., 297 B.R. 451 (Bankr. W.D. N.C. 2002)
(distinctive Medicare and Medicaid systems of estimated payments and later
adjustments qualified as “single transaction” for recoupment purposes); Sims v. Dep't
of Health & Human Servs. (In re TLC Hospitals, Inc.), 224 F.3d 1008, 1012 (9th Cir.
2000) (concluding that “under this specialized and continuous system of estimated
payments and subsequent adjustments, HHS’s overpayments and its underpayments
in a subsequent fiscal year were parts of the same transaction for purposes of
recoupment.”); United States v. Consumer Health Services of America, Inc., 108 F.3d
390, 392-393 (D.C. Cir.1997) (prior overpayments that provider received were part
of “same transaction” for equitable recoupment purposes, as provider’s claim against
government for medical services it provided during its Chapter 11 case.). “These
cases characterize the reimbursement system between Medicare and the provider as
a single transaction, because the particularities of the Medicare statutes create a
‘specialized and continuous system of estimated payments and subsequent
adjustments.’” Slater Health Center, Inc. v. United States (In re Slater Health Center,
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9
Inc.), 294 B.R. 423, 429 (Bankr. D. R.I. 2003), vacated in part, 306 B.R. 20 (D. R.I.
2004, aff’d, 398 F.3d 98 (1st Cir. 2005), quoting Sims, 224 F.3d at 1012. See also
Powell v. FELRA (In re Powell), 284 B.R. 573 (Bankr. D. Md. 2002) (recognizing
that a creditor “is not required to seek judicial approval prior to recoupment because
the ‘right of recoupment does not constitute a debt which is dischargeable.’”)
WHEREFORE, the motion of the State of Maryland for summary judgment
will be granted and the instant complaint will be dismissed.
ORDER ACCORDINGLY.
END OF OPINION
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cc: Joel I. Sher, Esquire
Kimberly Manchester Stoker, Esquire
Paul V. Danielson, Esquire
Shapiro Sher Guinot & Sandler
36 S. Charles Street
Suite 2000
Baltimore, Maryland 21201
Counsel to the Debtor
Elizabeth Mary Kameen, Esquire
Louis C. Cashiola, Esquire
300 W. Preston Street
Suite 302
Baltimore, Maryland 21201
Paul Jennings Ballard. Esquire
Maryland Department of Health & Mental Hygiene
55 Wade Avenue
Catonsville, Maryland 21228
Counsel to the State of Maryland
Mark A. Neal, Esquire
Assistant U.S. Trustee
U.S. Courthouse, Room 2625
101 W. Lombard Street
Baltimore, Maryland 21201
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