975 F.3d 926
9th Cir.2020Background
- Gardens Regional, a noncontract private nonprofit Medi-Cal hospital, stopped paying California’s Hospital Quality Assurance Fee (HQAF) beginning March 2015 and filed Chapter 11 in June 2016.
- California deducted unpaid HQAF assessments from two payment streams owed to the hospital: (a) HQAF-funded "supplemental" Medi‑Cal payments drawn from a segregated HQAR Fund, and (b) ordinary fee‑for‑service Medi‑Cal payments.
- The State recovered substantial sums pre- and postpetition by withholding portions of those payments; Gardens Regional sought return of the withholdings as improper setoffs that violated the Bankruptcy Code’s automatic stay.
- The bankruptcy court and the Ninth Circuit BAP held California’s deductions were permissible recoupment (and thus not barred by the automatic stay); Gardens Regional appealed to the Ninth Circuit.
- The Ninth Circuit applied the established ‘‘logical relationship’’ test for recoupment and held: deductions from HQAF-funded supplemental payments were permissible recoupment, but deductions from fee‑for‑service payments were not and instead constituted setoffs subject to bankruptcy restrictions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether California's withholdings from hospital payments are recoupment (exempt from the automatic stay) or impermissible setoffs | Withholding HQAF amounts is a prepetition setoff violating § 362 and § 553 | Withholding is equitable recoupment because counterclaims arise from the same transaction/ program | Recoupment may apply but depends on the logical relationship; not all withholdings qualify |
| Deduction from HQAF‑funded supplemental payments | These are independent payments; deduction is an improper setoff | Supplemental payments are drawn from the same segregated HQAR Fund created by HQAF and thus are part of the same transaction | Deduction from supplemental payments is permissible recoupment; AFFIRMED as to these deductions |
| Deduction from fee‑for‑service Medi‑Cal payments | Fee‑for‑service payments are separate; deduction is an impermissible setoff | Fee‑for‑service payments are tied into Medi‑Cal/provider agreement and §14169.52(h) authorizes deductions | Deduction from fee‑for‑service payments is a setoff, not recoupment; REVERSED as to these deductions |
| Whether a statutory/contractual right to offset alone establishes recoupment | State cannot convert setoff into recoupment merely by statute/contract | A state statute and provider agreement granting broad deduction rights suffice to create the logical relationship | Statute or contract alone is insufficient; factual and legal linkage beyond mere assertion of offset rights is required |
Key Cases Cited
- Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (Supreme Court) (explains setoff basics and relationship to automatic stay)
- Newbery Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392 (9th Cir.) (recognizes recoupment exception and formulates "logical relationship" test)
- Sims v. U.S. Dep’t of Health & Human Servs. (In re TLC Hosps., Inc.), 224 F.3d 1008 (9th Cir.) (allows recoupment where specialized, continuous estimated‑payment system creates single transaction)
- Reiter v. Cooper, 507 U.S. 258 (Supreme Court) (describes recoupment as permitting determination of liability on the main issue)
- Moore v. N.Y. Cotton Exch., 270 U.S. 593 (Supreme Court) (origin of the "logical relationship"/transactional test for compulsory counterclaims)
- University Med. Ctr. v. Sullivan (In re Univ. Med. Ctr.), 973 F.2d 1065 (3d Cir.) (provides a narrower test for "same transaction"; discussed and distinguished)
- Malinowski v. N.Y. State Dep’t of Labor (In re Malinowski), 156 F.3d 131 (2d Cir.) (warns against expanding recoupment in ways that undermine bankruptcy policy)
- Chicago Title Ins. Co. v. Seko Inv., Inc. (In re Seko Inv., Inc.), 156 F.3d 1005 (9th Cir.) (describes recoupment as defense to debtor's claim when arising from same transaction)