In re Doctors Hospital of Hyde Park

The State of Illinois (state) (plaintiff) had contractually agreed to pay Doctors Hospital of Hyde Park, Inc. (hospital) for medical services that the hospital provided to Medicaid patients, and the state owed money under this contract. The hospital assigned its right to collect that contractual debt to Daiwa Special Asset Corporation (Daiwa) (defendant). The hospital then filed a bankruptcy petition. At that point, the hospital owed taxes to the state. However, the hospital had few assets and many creditors, which meant that the state might not get any payment from those limited assets. Instead of seeking money for the hospital’s tax debt, the state requested permission from the bankruptcy court to set off the hospital’s tax debt against the state’s Medicaid debt, i.e., to reduce the state’s Medicaid bill by the amount of the hospital’s tax bill. However, as the hospital’s assignee, Daiwa now owned the right to payment for the state’s Medicaid bill. The bankruptcy court denied the state’s request, finding that (1) the attempted setoff was a noncontractual defense to the state’s Medicaid debt and (2) the state could not exercise a noncontractual defense that was specific to the hospital after the hospital’s contractual rights had been assigned to Daiwa. The district court reversed the ruling, finding that (1) the state’s right to a setoff was an implied term in the Medicaid contract and (2) the state could enforce its implied contractual right to a setoff even after the hospital assigned its contractual rights to Daiwa. Daiwa appealed to the Seventh Circuit.