Holber, Trustee v. State Farm Mutual Automobile Insurance Company et

I N THE UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
I N RE 	: CHAPTER 7
AMERICAN REHAB & PHYSICAL 	:
THERAPY , I NC . 	:
DEBTOR 	:
CASE NO. 04-14562
ROBERT H. HOLBER, T RUSTEE 	:
PLAINTIFF 	:
V. 	:
STATE FARM M UTUAL AUTOMOBILE 	:
I NSURANCE COMPANY , AND STATE FARM 	:
FIRE AND CASUALTY I NSURANCE COMPANY :
DEFENDANTS : ADVS NO. 04-0991
:
O PINION
By: 	STEPHEN RASLAVICH , UNITED STATES BANKRUPTCY JUDGE .
Introduction
Before the Court is the Trustee’s Motion for Summary Judgment. State Farm
opposes the motion. For the reasons set forth below, the motion will be denied.
Procedural Background
The Trustee has filed suit against State Farm for turnover of certain accounts
receivable. State Farm filed an Answer and Counterclaim. The Counterclaim asserts
the right of setoff. The Trustee opposes the Counterclaim and has filed a motion for
summary judgment as to the setoff claim. Hearing on the matter was held on October
27, 2005 after which the parties were afforded the opportunity to supplement their brief.
The Court next took the matter under advisement.
Legal Standard
Motions for summary judgment are governed by Rule 56 of the Federal Rules of
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1 Fed.R.Civ.P. 56 is applicable to the instant proceeding pursuant to Rule 7056 of the
Federal Rules of Bankruptcy Procedure ("Fed.R.Bankr.P.")
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Civil Procedure ("Fed.R.Civ.P."). 1 Pursuant to Rule 56, summary judgment should be
granted when the "pleadings, depositions, answers to interrogatories, and admissions
on file, together with the affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a matter of law."
Fed.R.Civ.P. 56(c). For purposes of Rule 56, a fact is material if it might affect the
outcome of the case. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct.
2505, 2510, 91 L.Ed.2d 202 (1986). The moving party has the burden of demonstrating
that no genuine issue of fact exists. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106
S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986).
The court's role in deciding a motion for summary judgment is not to weigh
evidence, but rather to determine whether the evidence presented points to a
disagreement that must be decided at trial, or whether the undisputed facts are so one
sided that one party must prevail as a matter of law. See Anderson v. Liberty Lobby,
Inc., 477 U.S. at 247-252, 106 S.Ct. at 2509-12. In making this determination, the court
must consider all of the evidence presented, drawing all reasonable inferences
therefrom in the light most favorable to the nonmoving party, and against the movant.
See United States v. Premises Known as 717 South Woodward Street, 2 F.3d 529, 533
(3rd Cir.1993); J.F. Feeser, Inc. v. Serv-A-Portion, Inc., 909 F.2d 1524, 1531 (3d
Cir.1990), cert. denied, 499 U.S. 921, 111 S.Ct. 1313, 113 L.Ed.2d 246 (1991); Gould,
Inc. v. A & M Battery and Tire Service, 950 F.Supp. 653, 656 (M.D.Pa.1997).
To successfully oppose entry of summary judgment, the nonmoving party may
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not simply rest on its pleadings, but must designate specific factual averments through
the use of affidavits or other permissible evidentiary material that demonstrate a triable
factual dispute. Celotex Corp. v. Catrett, 477 U.S. at 324, 106 S.Ct. at 2553; Anderson
v. Liberty Lobby, Inc., 477 U.S. at 247-50, 106 S.Ct. at 2509-11. Such evidence must be
sufficient to support a jury's factual determination in favor of the nonmoving party. Id.
Evidence that merely raises some metaphysical doubt regarding the validity of a
material fact is insufficient to satisfy the nonmoving party's burden. Matsushita Electric
Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1355-56,
89 L.Ed.2d 538 (1986). If the nonmoving party fails to adduce sufficient evidence in
connection with an essential element of the case for which it bears the burden of proof
at trial, the moving party is entitled to entry of summary judgment in its favor as a matter
of law. Celotex Corp. v. Catrett
The Factual Record
The Debtor was in the business of providing physical therapy and rehabilitation
services to patients including automobile accident victims. Complaint and Answer, ¶ 7.
Some of the patients treated by the Debtor were insured by State Farm. Id. ¶ 8. In
October 2003 State Farm filed suit against the Debtor in the United States District Court
alleging that the Debtor had submitted fraudulent bills which State Farm paid. See
Stipulation of Facts, Whereas clause #1. In November 2004 the Trustee filed suit
against State Farm to collect approximately $122,000 in prepetition accounts
receivable. Id., Whereas clause #3. The parties agree that the Debtor is liable to the
State Farm for the full amount claimed in the District Court action and that State Farm
owes the Debtor for $124,478.88 in unpaid prepetition bills. Id. ¶¶ (a), (d).
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Based on these stipulations, State Farm asserts the right of setoff.
Applicable Law
Section 553 of the Bankruptcy Code preserves the right of setoff:
Except as otherwise provided in this section and in sections
362 and 363 of this title, this title does not affect any right of
a creditor to offset a mutual debt owing by such creditor to
the debtor that arose before the commencement of the case
under this title against a claim of such creditor against the
debtor that arose before the commencement of the case...
11 U.S.C. § 553(a). Although no federal right of setoff is created by the Bankruptcy
Code, § 553(a) provides that, with certain exceptions, whatever right of setoff otherwise
exists is preserved in bankruptcy. Citizens Bank of Maryland v. Strumpf, 516 U.S. 16,
18, 116 S.Ct. 286, 289, 133 L.Ed.2d 258 (1995). The Supreme Court has explained the
applicability of setoff in bankruptcy cases: “The right of setoff (also called "offset") allows
entities that owe each other money to apply their mutual debts against each other,
thereby avoiding "the absurdity of making A pay B when B owes A." Studley v. Boylston
Nat. Bank, 229 U.S. 523, 528, 33 S.Ct. 806, 808, 57 L.Ed. 1313 (1913). In order to
possess a right of setoff, there must be a mutuality of obligations between the debtor
and the creditor asserting a right to setoff. For setoff purposes, debts are mutual if they
are “in the same right and between the same parties, standing in the same capacity." In
re Bevill, Bresler & Schulman Asset Management Corp., 896 F.2d 54, 59 (3d Cir.1990)
(quoting L. King, 4 Collier on Bankruptcy, ¶ 553.04[3], at 553-22 (15th ed.1979)). The
concept as defined by the Third Circuit thus involves three elements: party, right, and
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2There is no dispute that the respective claims are prepetition. See Stipulation of Facts,
WHEREAS clause #3 and (b).
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capacity. The element of mutuality is the crux of the parties’ disagreement.2 The Court
will now turn to the record to determine if mutuality is established.
Are the Debts Held
By the Same Parties?
The threshold requirement of mutuality is that the relevant claim and debt exist
between the “same parties,” meaning simply enough that where A and B may offset
their mutual obligations, A may not offset an obligation that it owes to B against a debt
that B owes to C. 	5 Collier on Bankruptcy, ¶ 553.03[3][b]. The requirement prevents
so-called “triangular” or “circuitous” setoffs which, the Trustee insists, is what State
Farm is attempting to do here. Trustee Brief, 6. The Trustee explains that “[State Farm]
would have their obligation to the insured reduced by the obligation allegedly owed by
debtor to the defendants.” Id. This argument is a variation on the Collier hypothetical: A
(here, State Farm) may not offset its obligation to C (here, the insured patients) against
that debt which B (the Debtor providers – now the estate) owes to A (State Farm). As to
what obligation exactly State Farm has to its insureds, the Trustee does not explain. It
is somehow based on their contract: State Farm’s debt is “still inherently an obligation
owed to the insured on the basis of the insurance contract entered into with the
insured.” Trustee Brief, 6 (emphasis added). So it is the absence of a contract between
the Debtor and State Farm which renders the proposed setoff circuitous. Id.
State Farm responds that, as a matter of law, the premise of the Trustee’s
argument – that State Farm is trying to offset a debt owed to a third party – is a false
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375 P.S. § 1701 et seq.
4In pertinent part, that statute provides:
[ ]Providers subject to this section may not bill the insured directly but
must bill the insurer for a determination of the amount payable. The
provider shall not bill or otherwise attempt to collect from the insured
the difference between the provider's full charge and the amount
paid by the insurer.
75 P.S. § 1797(a).
531 Pa.Code § 69.22(d); (e).
631 Pa.Code § 69.22(h)
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one. Under the Pennsylvania Motor Vehicle Financial Responsibility Law, 3 State Farm
explains, the Debtor was prohibited from billing the car accident patients and was
required instead to bill the insurer (here, State Farm) directly. Id. 4 If the patients could
not be billed, the argument continues, then no right of indemnification arose on their
part. The corollary to that argument, State Farm concludes, is that the unpaid $122,000
is not an obligation to its insureds. If that is the case, then there is no “triangulation”
here.
At the hearing, the Trustee requested an opportunity to address State Farm’s
argument. The Trustee’s Supplemental Brief points out that there are exceptions to the
motor vehicle law’s requirement that the provider bill the insurer as opposed to the
patient. He cites to regulations in the Pennsylvania Code which permit the provider to
bill the patient when the insurer has advised the insured that its benefits have been
exhausted. 5 Trustee’s Supplemental Brief, 2. Likewise, such direct billing may occur
when no portion of the provider’s bill is payable by the insurer.6 Id. For the Trustee, this
demonstrates that the insurer is liable to the patients. And that reestablishes the
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triangulation necessary to invalidate this intended setoff.
In reviewing the Trustee’s arguments, the Court finds them to be flawed in a
number of respects. First, the Trustee’s emphasis that “there was no individual contract
between the debtor [the providers] and defendants [State Farm]” is a red herring.
Section 553 does not require a contract. Indeed, the statute never uses the term and
speaks, instead, of “debts” and “claims.” See 11 U.S.C. § 553. The claim in this
instance, as State Farm correctly points out, is created by the Pennsylvania motor
vehicle statute; it is not a creature of contract. Second, according to the Stipulation, the
Debtor providers were “statutorily obligated to bill State Farm directly for the
$121,748.88 and [was prohibited from billing] patients for any part of that amount.” See
Stipulation, ¶ (d). If, as the parties stipulated, State Farm was responsible for the entire
receivable, then this Court may not find that either of the exceptions to the provider-
insurer billing requirement apply. 	See Combustion Systems Services, Inc. v. Schulkyll
Energy Resources, Inc., 1994 WL 229762 *2 (E.D.Pa.1992) (“Stipulations as to fact are
binding on the parties and the Court.”); Cole v. Altieri, 534 F.Supp. 165, 167
(E.D.Pa.1981). But even assuming no stipulation, the Trustee has the burden of
proving that an exception applies. Yet all he offers is argument and that is stated in the
subjunctive. There is nothing before the Court indicating that the patients’ policy limits
had in some cases been exhausted or that the services rendered were not covered
under the policies. So if there is no evidence that the providers ever billed the patients,
then State Farm never became liable to those patients for indemnification. The record,
then, shows that the only “parties” holding claims and debts are State Farm and the
Debtor.
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Are the Debts Owned
in the Same Right?
In general, the requirement that obligations be owed in the same right simply
enforces the rule that joint obligations are not subject to setoff against separate debts in
bankruptcy. 5 Collier on Bankruptcy ¶ 553.03[3][d][i]; In re Chestnut Co., 39 B.R. 519,
521 (Bankr.D.S.D. 1984). Nothing about the respective obligations indicates that either
is jointly held. Each is held exclusively: the Trustee has succeeded to Debtor’s claim for
$122,000 in unpaid receivables while State Farm has a claim against the estate for
fraudulent billing.
Are the Debts Owned
in the Same Capacity?
Collier explains what “capacity” is understood to mean in this context:
The distinction between the concept of "capacity" and the
requirement that the obligations be owed between the "same
parties" is that the latter refers to the identity of the parties
whereas the former refers to their relationship to each
other....
As a general rule, the concept of capacity requires that the
parties must each owe the other something in his or her own
name, and not as a fiduciary.... [I]f A in his individual
capacity owes $100 to B, but B owes $50 to A in A's capacity
as a trustee of a trust, or as a fiduciary or agent for some
other party, the obligations are not mutual because they are
not owed between the parties acting in the same "capacity."
5 Collier on Bankruptcy ¶ 553.03[3][c]; In re Nuclear Imaging Systems, Inc., 260 B.R.
724, 734-35 (Bankr.E.D.Pa.2000); In re Bevill, Bresler & Schulman Asset Management
Corp., 896 F.2d at 58. It is the Trustee’s position that State Farm’s status as insurer for
the patients means that it does not hold the claim in its own capacity. Trustee Brief, 6.
The Court finds this argument to be sophistic. It was not the patients of the Debtor that
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were defrauded; they received services from the Debtor albeit perhaps fewer services
than were billed for. State Farm, on the other hand, was indeed defrauded having paid
the Debtor for services some of which were never rendered. All of this is admitted in the
Stipulation of Facts. So the fact that State Farm was defrauded while insuring
fraudulent claims has nothing to do with whether State Farm suffered direct harm which
gives rise to a direct claim against the Debtors. State Farm holds a fraud claim against
the Debtor in its own capacity and may set it off against what it owes the Debtor’s
estate.
In summary, each of the three elements required for a claim of setoff – same
party, right, and capacity – are demonstrated by this record. For that reason, the
Trustee’s motion for summary judgment as to State Farm’s defense of setoff will be
denied.
An appropriate order follows.
By the Court:
____________________________________
Stephen Raslavich
United States Bankruptcy Judge
Dated: 	November 16, 2005
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IN THE U NITED S TATES B ANKRUPTCY C OURT
F OR THE E ASTERN D ISTRICT OF P ENNSYLVANIA
I N RE 	: CHAPTER 7
:
AMERICAN REHAB & PHYSICAL 	:
THERAPY , I NC . 	:
DEBTOR 	:
CASE NO. 04-14562
ROBERT H. HOLBER , TRUSTEE 	:
PLAINTIFF 	:
V . 	:
STATE FARM M UTUAL AUTOMOBILE 	:
I NSURANCE COMPANY , AND STATE FARM 	:
FIRE AND CASUALTY I NSURANCE 	:
COMPANY 	:
DEFENDANTS : ADVERSARY NO. 04-0991
:
ORDER
AND NOW upon consideration of the Plaintiff’s Motion for Summary Judgment,
State Farm’s Response, after hearing held on October 27, 2005, and for the reasons set
forth in the attached Opinion, it is
ORDERED that the Motion is Denied.
By the Court:
___________________________________
Stephen Raslavich
United States Bankruptcy Judge
Dated: 	November 16, 2005
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MAILING LIST:
George Conway, Esquire
Office Of The U.S. Trustee
833 Chestnut Street
Suite 500
Philadelphia PA 19106
William J. Burnett, Esquire
SMITH, GIACOMETTI & CHIKOWSKI, LLC
Land Title Bldg
100 South Broad Street, Suite 1200
Philadelphia, PA 19110
Dexter K. Case, Esquire
Case & DiGiamberardino & LUTZ, P.C.
541 Court Street
Reading, PA 19601
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