filed: August 24, 1992; As Corrected November 9, 1992.
On Appeal From the United States District Court For the Eastern District of Pennsylvania. (D.C. Civil Action No. 89-0411)
Before: Becker, Roth, Circuit Judges, and McCUNE, District Judge*fn1
These consolidated cross-appeals by plaintiffs, University Medical Center ("UMC") and the Official Creditors' Committee, and defendant Louis W. Sullivan, Secretary of Health and Human Services, require us to delineate the appropriate relationship between a Medicare provider and the Department of Health and Human Services ("HHS" or "the Department") from the time of the provider's bankruptcy petition filing until its cessation of business--a relationship shaped by the intersection of the Medicare Act and the Bankruptcy Code. Specifically, UMC raises the question of whether HHS, seeking to recover pre-petition Medicare provider reimbursement overpayments, may withhold payments for Medicare services rendered post-petition without controverting the Bankruptcy Code's automatic stay. The Secretary appeals the order of the district court, affirming the bankruptcy court's finding that HHS violated the automatic stay by withholding such payments. UMC has filed a cross-appeal based on the district court's reversal of the bankruptcy court's award of attorneys' fees and costs to UMC. The district court found that the Department's violation of the automatic stay was not "willful," as is required for such an award under Bankruptcy Code section 362(h).
We agree with the district court that the Secretary's withholding of UMC's Medicare reimbursement, due for services rendered post-petition, in an attempt to recover pre-petition Medicare overpayments, violated the Bankruptcy Code's automatic stay. We further find that this violation was not willful as required for a section 362(h) award of attorneys' fees and costs. We will, therefore, affirm.
I. STATUTORY AND REGULATORY
UMC was a participant in the Medicare program, 42 U.S.C. §§ 1395-1395ccc (1988 & Supp. I 1989), which provides health insurance for the elderly and disabled.*fn2 As a general care hospital, UMC serviced Medicare beneficiaries pursuant to a "provider agreement" filed with HHS. This agreement, executed in 1966 between the Broad Street Hospital and the Secretary of Health, Education and Welfare, the predecessors in interest to UMC and HHS respectively, is similar to provider agreements entered into by hospitals and health care facilities across the country. Through executing the provider agreement, Broad Street Hospital became eligible to receive reimbursement payments, in accordance with the terms of the Medicare statute, for services rendered to Medicare beneficiaries. In exchange, the hospital agreed to charge these beneficiaries only as allowed by statute and to comply with certain civil rights laws in providing these services.*fn3
Medicare reimbursement of inpatient hospital services is governed by the Prospective Payment System ("PPS"). Under PPS, each discharged patient is classified into a Diagnosis Related Group ("DRG"). Providers are paid most reimbursable expenses pursuant to predetermined, national and regional rates that are fixed for each DRG. See 42 U.S.C. § 1395ww(d). HHS makes these reimbursements through fiscal intermediaries, such as the Blue Cross Association. To insure that providers are paid promptly, the Medicare statute requires that payments be made at least monthly and otherwise at the discretion of HHS. 42 U.S.C. § 1395g(a). Under the usual reimbursement procedure, periodic interim payments, which are estimates of actual expenditures, are made by the intermediary upon application of a provider at the discharge of each Medicare patient. Providers are also entitled to receive additional estimated payments based on their actual costs for capital expenses, outpatient services, and certain other costs. 42 C.F.R. § 412.113 (1991). Actual expenditures of each provider are audited by the intermediary annually to determine whether the provider has been over or underpaid for that cost-year. HHS then adjusts the provider's subsequent Medicare reimbursement payments to account for prior over or underpayments. 42 U.S.C. § 1395g(a). Such adjustments are mandated by Medicare's PPS.
On January 1, 1988, UMC filed a voluntary petition under Chapter 11 of the Bankruptcy Code. 11 U.S.C. §§ 101-1330 (1988 & Supp. II 1990). After this filing UMC continued to serve Medicare patients as a debtor-in-possession. One week later, on January 8, 1988, Blue Cross of Greater Philadelphia ("Blue Cross"), UMC's fiscal intermediary, informed UMC by letter that the hospital had been overpaid $276,042 for Medicare services provided in 1985. This letter stated that Blue Cross would begin 100% withholding of interim reimbursement payments unless UMC made repayment or agreed to a long-term repayment schedule. UMC did not respond. On February 8, 1988, Blue Cross sent a second letter, again stating that 100% withholding of interim payments would begin unless other arrangements for return of the overpayment were made. Blue Cross subsequently withheld a $58,000 payment on February 18.
Prompted by this action, UMC officials met with a Blue Cross representative and orally agreed to provide Blue Cross with documentation detailing UMC's need for an extended repayment schedule. In the interim, UMC agreed to repay the 1985 overpayment at a rate of $15,000 per month over a period of 18 months. The UMC officials apparently consented to this arrangement in order to maintain the hospital's flow of Medicare reimbursement, which it required to meet its payroll obligations. On March 4, 1988, UMC remitted $15,000 to Blue Cross, after which Blue Cross released the $58,000 it had withheld. However, UMC neither sought court approval of this arrangement nor advised any other interested party, including the Creditors' Committee, of this repayment plan. UMC failed to supply Blue Cross with the documentation needed to formalize the repayment agreement. On March 28, 1988, Blue Cross announced that it would resume 100% withholding. Three days later, UMC closed its doors and ceased doing business.
HHS, through Blue Cross, withheld from UMC a total of over $312,000 in reimbursement for Medicare services provided by UMC after it filed its petition in bankruptcy.*fn4 Meanwhile, Blue Cross determined that, in addition to the 1985 overpayment, UMC had been overpaid by $470,894 in 1986 and by $65,447 in 1987.
On June 17, 1988, UMC brought an adversary proceeding against HHS in the Bankruptcy Court for the Eastern District of Pennsylvania, alleging that the Department's actions, in demanding payment for pre-petition Medicare overpayments and in withholding post-petition reimbursement to recover the amounts overpaid, violated the automatic stay provision of the Bankruptcy Code, 11 U.S.C. § 362. UMC requested turnover of these funds, pursuant to Bankruptcy Code sections 542 and 543, and an award of attorneys' fees and costs under Code section 362(h). HHS answered by claiming the affirmative defense of contractual recoupment. On July 8, 1988, HHS filed a separate motion for relief from the automatic stay.
The bankruptcy court held that HHS had violated the Bankruptcy Code's automatic stay provision. This Conclusion was based upon the court's finding that UMC had not assumed its provider agreement and that as a consequence the Department's demand that UMC repay the pre-petition overpayments as a condition of receiving future Medicare reimbursement constituted the type of governmental discrimination against debtors prohibited by the anti-discrimination provision of the Bankruptcy code, 11 U.S.C. § 525(a).*fn5 In re University Medical Center, 93 Bankr. 412, 416-417 (Bankr. E.D. Pa. 1988). In reaching this decision, the bankruptcy Judge relied heavily on his opinion in an unrelated case, In re St. Mary Hospital, 89 Bankr. 503 (Bankr. E.D. Pa. 1988), which was decided while the present action was pending.*fn6 Because the bankruptcy court held the withholding to be impermissible under section 525(a), it also refused to grant relief from the stay under 11 U.S.C. § 362(d)*fn7 and ordered HHS both to return the $15,000 payment made by UMC in accord with the tentative repayment agreement and to pay UMC the amount due for post-petition Medicare services. University Medical Center, 93 Bankr. at 417-18. In addition, the court awarded UMC prejudgment interest, attorneys' fees, and costs, on the ground that the Department's decision to press this litigation after that court's decision in St. Mary Hospital amounted to a willful violation of the automatic stay. Id. at 418-19.
HHS appealed this decision to the United States District Court for the Eastern District of Pennsylvania. In a published opinion, the district court affirmed the holding that HHS had violated the automatic stay but disavowed the reasoning of the bankruptcy court, adjudging the record inadequate to support a finding of discrimination in violation of Bankruptcy Code section 525(a). University Medical Center v. Sullivan, 122 Bankr. 919 (E.D. Pa. 1990). Instead, the district court anchored its affirmance on its Conclusions (1) that UMC had not assumed the provider agreement because, as an executory contract, assumption of that agreement had to receive formal court approval, (2) that the Department's withholding did not fall within the equitable doctrine of recoupment because the pre-petition overpayments arose from different transactions than did the post-petition Medicare reimbursement, and (3) that equity controls the relationship between debtor and creditor if, during the period between a bankruptcy filing and the assumption or rejection of an executory contract, performance under the contract continues. However, the district court reversed the bankruptcy court's award of attorneys' fees and costs to UMC, finding that the Department's violation of the automatic stay was not willful as is required for such an award made under Bankruptcy Code section 362(h). The district court also denied the parties' motions for reconsideration. University Medical Center v. Sullivan, 125 Bankr. 121 (E.D. Pa. 1991). Judgment was stayed pending appeal.
Both parties filed timely notices of appeal to this court. We review the district court's decision under the same standards employed by the district court in reviewing the bankruptcy court's decision. Thus our review of the district court's Conclusions of law is plenary. We review findings of fact under the clearly erroneous standard. In re Nelson Co., 959 F.2d 1260, 1263 (3d Cir. 1992).
The Secretary now takes issue with our ability to exercise jurisdiction over this case and contends that neither the bankruptcy court nor the district court properly had jurisdiction over UMC's claims.*fn8 In particular, he contends that UMC's claims arise under the Medicare statute and points to 42 U.S.C. § 405(h), made applicable to Medicare claims by 42 U.S.C. § 1395ii, which precludes judicial review of any "claim arising under" the Medicare statute prior to the exhaustion of administrative remedies.*fn9 Because we agree with UMC that the Bankruptcy Code supplies an independent basis for jurisdiction in this case, we reject the Secretary's arguments and find that the district and bankruptcy courts properly had jurisdiction under 28 U.S.C §§ 157, 158 and 1334 and that we may properly exercise jurisdiction over this appeal under 28 U.S.C. §§ 158(d) and 1291.
The Medicare Act establishes an administrative channel of redress for health care providers dissatisfied with their reimbursement determinations. If a provider disputes an intermediary's final determination of the reimbursement due for a fiscal year and the amount in controversy exceeds $10,000, the provider can, within 180 days, request a hearing before the Provider Reimbursement Review Board. 42 U.S.C. § 1395oo(a). The Board's decision is then subject to review by the Secretary. After exhausting these procedures, a provider may seek judicial review of the final agency determination. 42 U.S.C. § 1395oo(f)(1). See, e.g., Abington Memorial Hosp. v. Heckler, 750 F.2d 242, 244 (3d Cir. 1984), cert. denied, 474 U.S. 863, 106 S. Ct. 180, 88 L. Ed. 2d 149 (1985). Prior to the exhaustion of this administrative channel of review, no court has jurisdiction over claims arising under the Medicare Act.
Neither party contends that these administrative procedures were in fact exhausted in this case. Our ability to exercise jurisdiction over this appeal thus turns on whether UMC's claims actually arise under the Medicare statute. The Supreme Court has construed the "claim arising under" language of section 405(h) broadly to encompass any claims in which "both the standing and the substantive basis for the presentation" of the claims is the Medicare Act. Heckler v. Ringer, 466 U.S. 602, 615, 104 S. Ct. 2013, 2022, 80 L. Ed. 2d 622 (1984) (quoting Weinberger v. Salfi, 422 U.S. 749, 760-61, 95 S. Ct. 2457, 2464-65, 45 L. Ed. 2d 522 (1975)). According to the Secretary, both requirements are satisfied in this case: the complaint seeks a money judgment in payment for health care services provided by UMC to Medicare beneficiaries and the reimbursement sought by UMC conforms to the rates established by the Medicare Act.
UMC responds that the administrative review channel set forth in the Medicare Act and regulations is available only for claims brought by a provider when dissatisfied with final reimbursement determinations of the fiscal intermediary. See 42 C.F.R. § 405.1841 (1991) (a request for a Board hearing "must identify the aspects of the determination with which the provider is dissatisfied, explain why the provider believes the determination is incorrect in such particulars, and be accompanied by any documenting evidence the provider considers necessary to support its position"). This case, however, does not raise that type of claim, because the parties do not dispute the amount of reimbursement due for any cost reporting period. In fact, the parties stipulated both to the amounts of the overpayments made to UMC and to the separate pursuit of any substantive dispute concerning these amounts through the normal administrative processes set forth in the Medicare statute. Due to the fact that its adversary proceeding was based on the contention that HHS violated the automatic stay provision of the Bankruptcy Code, UMC maintains that its claims arose under the Bankruptcy Code, not the Medicare Act. Thus, the mandate of section 405(h) that the Medicare Act's administrative review procedures be exhausted before judicial review is sought simply does not apply to this case.
We agree with UMC. Its challenge to the Secretary's attempt to recover pre-petition overpayments through post-petition withholding is not inextricably intertwined with any dispute concerning the fiscal intermediary's reimbursement determinations. If UMC had not filed for bankruptcy, there would be no dispute concerning the monies due to HHS or the method for recovering them. Neither party questions the amount of pre-petition overpayments made to UMC nor any other determination of the fiscal intermediary that might be appealed to the Provider Reimbursement Review Board. Nor does either party take issue with the procedure by which the statute provides for making routine adjustments with a non-bankrupt provider for prior over or underpayments. See 42 U.S.C. § 1395g(a). This issue is only before us because UMC filed for bankruptcy and now claims that the withholding violated the automatic stay. We find, therefore, that UMC's claim arises under the Bankruptcy Code and not under the Medicare statute.
In doing so, we recognize that a broad reading of section 405(h) might accord with Congress' intent to allow "the Secretary in Medicare disputes to develop the record and base decisions upon his unique expertise in the health care field. The misfortune that a provider is in bankruptcy when he has a reimbursement dispute with the Secretary should not upset the careful balance between administrative and judicial review." In re St. Mary Hosp., 123 Bankr. 14, 17 (E.D. Pa. 1991). However, a finding that jurisdiction is proper in this case does not impinge upon this authority of the Secretary protected by section 405(h). Indeed, there is no danger of rendering the administrative review channel superfluous, for there is no system of administrative review in place to address the issues raised by UMC in its adversary proceeding. Thus we agree with the Ninth Circuit that "where there is an independent basis for bankruptcy court jurisdiction, exhaustion of administrative remedies pursuant to other jurisdictional statutes is not required." In re Town & Country Home Nursing Servs. Inc., 963 F.2d 1146, 1154 (9th Cir. 1991). This Conclusion advances the congressionally-endorsed objective of "the effective and expeditious resolution of all matters connected to the bankruptcy estate." Id. at 1155. See also H.R. Rep. No. 595, 95th Cong., 1st Sess. 43-48, reprinted in 1978 U.S.C.C.A.N. 5963, 6004-08. The Secretary's attack on the ability of the judicial system to resolve UMC's claims thus fails.
Having determined that we do have jurisdiction to hear this appeal, we must next consider whether the Department's withholding of UMC's post-petition payments violated the automatic stay provision of the Bankruptcy Code. To resolve this question we undertake a multiple-step analysis. First, does the automatic stay apply to government entities. Second, if it does, did UMC, after it filed for bankruptcy, assume its provider agreement. An important aspect of this second issue is whether formal court approval is a prerequisite to assumption of an executory contract pursuant to section 365 of the Bankruptcy Code. Third, even if the automatic stay is applicable and the agreement was not assumed, did HHS's withholding fall within the scope of the recoupment doctrine. Finally, if we find that the recoupment doctrine does not apply, does equity control the post-petition relationship between UMC and HHS; and, if it does, is HHS permitted under the provisions of the Medicare Act to reimburse a provider without making adjustments for past overpayments.
The automatic stay is one of the fundamental debtor protections supplied by the Bankruptcy Code. In re Atlantic Business & Community Corp., 901 F.2d 325, 327 (3d Cir. 1990).
Codified in section 362, the stay "prohibits, inter alia, the commencement or continuation of a judicial or administrative proceeding against the debtor that could have been initiated before the petition was filed, or to recover on a claim that arose pre-bankruptcy." United States v. Nicolet, Inc., 857 F.2d 202, 207 (3d Cir. 1988). The stay gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits a debtor to ...