• Factors of Medicaid Receivables Left with Unsecured Claims
  • January 11, 2018 | Author: Lawrence D. Coppel
  • Law Firm: Gordon Feinblatt LLC - Baltimore Office
  • A factoring arrangement occurs when a debtor sells its receivables to a third party for an agreed upon discounted amount. Under the typical agreement, the debtor must pay the factor the entire amount of the receivable in daily, weekly or monthly installments. In a recent Texas bankruptcy case the debtor, a home healthcare agency, entered into agreements with two factors prior to bankruptcy under which certain Medicaid receivables were sold to the factors. When the debtor filed for bankruptcy under Chapter 11 it owed one factor approximately $222,000 and the other $31,000. Both factors filed proofs of claim in the bankruptcy case asserting a security interest in the debtor’s accounts, including deposit accounts. The debtor objected to both claims on the basis that the transactions were disguised loans that were usurious, and that the factors’ claims were unsecured because federal law prohibits Medicaid receivables from being assigned. The bankruptcy court overruled the first objection after concluding that the transactions were true sales, not loans, and that the sales were not subject to the applicable state usury statute. However, the second objection was sustained. In doing so, the court based its decision on its reading of 42 U.S.C. §1396a(a)(32), which prohibits Medicaid payments from being made to anyone other than the provider of the service for which the payment was made. Although the anti-assignment law contains exceptions, the court held that none of the exceptions applied to the subject factoring transactions. Accordingly, the court ruled that the factors’ claims were unsecured. The bankruptcy court’s decision is not surprising since most factors and lenders are aware of the federal laws requiring that Medicare and Medicaid payments be made only to the provider. Apparently, the factors did not structure their transactions in a way that would minimize the effect of such laws. One common arrangement structured by factors and lenders for Medicare and Medicaid receivables is to require their seller or borrower to set up two accounts. The first account is for the purpose of receiving Medicare and Medicaid payments. The second would be a concentration account controlled by the factor or lender into which the Medicare or Medicaid payments made to the first account would be automatically transferred by the depository bank. Although the factor or lender may be barred in enforcing their rights to the first account, applicable case law and federal regulations hold that the factor or lender is not barred from debiting the second account since the second account is not the direct recipient of the payments.