MORE ON PREJUDGMENT ATTACHMENT AND GARNISHMENT
LIABILITY OF GUARANTORS OR ACCOMMODATION PARTIES WHEN THE ORIGINAL OBLIGATION IS MATERIALLY ALTERED

THE VALIDITY OF SECURITY INTERESTS IN MEDICARE RECEIVABLES

Lock Realty Corp. v. U.S. Health LP, which was the backdrop of my December 14, 2006 post, continues to be a lawyer’s dream in terms of complexity and challenges.  The case also continues to be educational for creditors that need to protect their rights in deals gone bad.  The lawsuit, which is pending in the Northern District of Indiana under case number 3:06-cv-487, involves six different law firms, as well as the U.S. Attorney’s Office, and nine parties.  The February 27, 2007 opinion from Judge Robert L. Miller, Jr. addresses a priority dispute over accounts receivable, specifically Medicare receivables. 

The parties.  In this piece of the case, secured creditors National City Bank (“Nat City”) and Health Care Services (“HCS”) battled judgment creditor Lock Realty.  The secured creditors sought an order directing AdminiStar Federal, the entity responsible for processing the Medicare claims of Americare (a nursing home business), to pay them funds that represent their secured interests in the A/R of Americare.  Lock at 1-2.  HCS provided housekeeping services for Americare nursing homes and, in lieu of immediate payment, took a secured interest in Americare’s A/R.  Nat City took an interest in Americare’s A/R to secure payment under a loan agreement with an affiliate of Americare.  In November of 2005, before Lock Realty became a judgment creditor, Nat City and HCS perfected their security interests through the filing of appropriate financing statements with the Indiana Secretary of State.

Priority.  A prior perfected security interest is superior to a judgment lien.  SeeInd. Code 26-1-9.1-317 and 322 HCS and Nat City filed appropriate financing statements with the Secretary of State.  They perfected their security interests in Americare’s A/R before Lock Realty became a judgment creditor.  As such, HCA and Nat City had superior claims to the funds.  Id. at. 5.

Validity:  the anti-assignment statute.  The more meaty issue related to the validity of the security interests in the first place.  Lock Realty argued that the funds at issue were Medicare payments and that the federal “anti-assignment” statute rendered the interests in the A/R unenforceable.  The opinion gets into an involved and technical discussion of the anti-assignment statute, 42 U.S.C. 1395g(c).  Generally, the statute prohibits Medicare funds from being paid directly to someone other than the provider.  The statute does not, however, prohibit someone other than the provider from receiving the funds if they first flow through the providerId. at 3.  As a fundamental proposition, therefore, lenders can secure loans by Medicare receivables.  Id. at 4.  In Lock, neither secured party had a right to file a claim for direct payment of Medicare funds.  The rights flowed through the medical provider.   “[N]either [HCS nor Nat City] could receive Medicare funds pursuant to their arrangement without subsequent judicial enforcement of the security agreement.”  Id. at 9. 

Lien enforcement.  Whether and how the subject security interests could be enforced was a critical question in Lock.  Judge Miller held that, although federal law preempts non-judicial enforcement of the such security interests under the UCC, HCS and Nat City ultimately could receive direct payment by court order.  The financing arrangements of HCS and Nat City were valid and in accord with the anti-assignment statute.  Judge Miller merely enforced the security agreements.  His court-ordered assignment, which directed payment from AdminiStar to the secured parties, did not violate the anti-assignment statute.  Id. at 9-10.

Cliff notes.  Judge Miller’s February 27 opinion teaches us that (1) a prior security interest is superior to a judgment lien, (2) a lender can take a valid security interest in the Medicare A/R of a medical provider and (3) the enforcement of the security interest – the right to directly receive the money – requires a court order.

If you’re a commercial lending institution with loans secured by governmental Medicare payments, you or your lawyer should study Judge Miller’s opinion further.  Also, stay tuned for additional court commentary that may arise out of this fairly complex lawsuit.  Lenders who deal with nursing home borrowers and related entities will continue to learn from the issues being litigated in Lock.

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