In re Gardens Regional Hospital and Medical Center, Inc.

Case Type:
Case Status:
Affirmed in part and Reversed in part
No. 18-60016 (9th Circuit, Sep 16,2020) Published
9th Cir. affirmed in part and reversed in part BAP decision affirming bankruptcy court's denial of Chapter 11 debtor's motion asserting that State of California and Dept. of Health Care Services violated the automatic stay by deducting unpaid fees from payments that the State was obligated to make to the debtor under state Medicaid program. Bankruptcy court improperly concluded that recoupment applied to all amounts, rather than setoff. However, portions of transactions were not same and thus recoupment did not apply.
Procedural context:
Bankruptcy court denied chapter 11 debtor's motion for enforcement of automatic stay against State of California and Dept. of Health Care Services. Debtor appealed to BAP for 9th Cir., which affirmed. Debtor appealed to 9th Circuit.
To raise Medi-Cal funding, California imposed a “Hospital Quality Assurance Fee” (“HQAF”) on non-public hospitals, such as the debtor, pursuant to a federal-law exception for certain healthcare taxes that do not contain an impermissible “hold harmless” provision. The debtor stopped paying its HQAF assessments before it filed for bankruptcy. The State recovered the prepetition HQAF debt by withholding a portion of the Medi-Cal payments it owed the hospital, including both fee-for-service payments and “supplemental” payments under the HQAF program, and the State continued to make such deductions postpetition. The debtor argued that the State’s withholding of unpaid HQAF amounts constituted an improper setoff that violated the automatic stay imposed under 11 U.S.C. § 362. The bankruptcy court concluded that the limitation on setoffs did not apply because the State’s withholdings amounted to equitable recoupment rather than setoff.
Wardlaw, Collins, Bataillon

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