In re Holyoke Nursing Home, Inc.

Holyoke Nursing Home, Inc. (Holyoke) (debtor) participated in a Medicare provider agreement under which the federal Health Care Financing Administration (HCFA) (creditor) periodically reimbursed Holyoke for services provided to Medicare patients. If HCFA determined that a provider had overstated past reimbursement requests, HCFA could adjust the provider’s pending reimbursement requests to recover the previous overpayments. In 2000, Holyoke filed for chapter 11 bankruptcy. Also in 2000, HCFA determined that it had overpaid Holyoke in 1997 and 1998 and deducted $177,656.25 from Holyoke’s pending reimbursement requests. Of that amount, $99,965.97 was deducted before Holyoke’s bankruptcy filing and $77,690.28 was deducted after Holyoke’s bankruptcy filing. Holyoke commenced an adversary proceeding against HCFA in the bankruptcy case, asserting that HCFA’s prepetition deductions were voidable preferential transfers and that HCFA’s postpetition deductions violated 11 U.S.C. § 362(a)’s automatic stay of the setoff of any prepetition debts owing to the debtor. The bankruptcy court granted summary judgment for HCFA, and the district court affirmed. Holyoke appealed to the First Circuit. On appeal, the court examined whether HCFA’s deductions should be considered a setoff (i.e., canceling-out of debts that the debtor and creditor owed to each other from different transactions) or a recoupment (i.e., recovery of a debt owed by the debtor to the creditor that arose out of the same transaction as a debt owed by the creditor to the debtor). A setoff would be a voidable preferential transfer or an automatic-stay violation, but a recoupment would not. Although other federal appellate circuits disagreed on how to classify HCFA deductions, most courts treated them as recoupments.