## Facts

- Holyoke Nursing Home, Inc. participated in Medicare under a provider agreement providing periodic interim reimbursements subject to later audit and statutory adjustment.
- After audits of cost years 1997 and 1998, the agency administering Medicare determined it had overpaid Holyoke $373,639.
- The agency withheld $177,656.25 (overpayment plus interest) from Holyoke’s cost-year 2000 reimbursement requests.
- Of that amount, $99,965.97 was withheld before Holyoke filed Chapter 11, and $77,690.28 was withheld after the petition date.
- Holyoke and the official unsecured creditors’ committee brought an adversary proceeding alleging (i) the prepetition withholdings were avoidable preferences under 11 U.S.C. § 547(b) and (ii) the postpetition withholdings violated the automatic stay, including 11 U.S.C. § 362(a)(7).
- The bankruptcy court granted summary judgment to the government, characterizing the withholdings as recoupment rather than setoff; the district court affirmed.

## Issues

1. Whether Medicare overpayment deductions from ongoing reimbursements under a single provider agreement are properly characterized as recoupment or setoff in bankruptcy.
2. If the prepetition deductions were setoff-like transfers, whether they were avoidable preferences under 11 U.S.C. § 547(b).
3. If the postpetition deductions were setoffs, whether they violated the automatic stay under 11 U.S.C. § 362(a)(7).

## Decision

- The First Circuit affirmed summary judgment for the government.
- The court held the deductions were recoupment because the interim payments, audits, and later adjustments formed one continuous reimbursement relationship under the provider agreement and Medicare’s statutory scheme.
- Because the deductions were recoupment, the prepetition withholdings were not avoidable preferences under § 547(b).
- Because the deductions were recoupment rather than setoff, § 362(a)(7) did not bar the postpetition withholdings.

## Legal Principles

- Setoff concerns mutual debts arising from separate transactions and is generally subject to Bankruptcy Code limits, including the automatic stay and preference rules.
- Recoupment permits a creditor to reduce what it owes the debtor based on obligations arising from the same transaction and functions as an equitable adjustment of the debtor’s claim rather than payment on an independent debt.
- Under Medicare’s interim-payment and audit-adjustment structure, overpayments and later reimbursements under the same provider agreement may constitute a single transaction for recoupment purposes.
- When a withholding is recoupment, it is not treated as a transfer avoidable as a preference under § 547(b) and is not stayed as a setoff under § 362(a)(7).

## Conclusion

The court treated Medicare overpayment recoveries taken from later reimbursements under the same provider agreement as recoupment within one integrated transaction, leaving the government’s prepetition deductions insulated from preference avoidance and its postpetition deductions outside the automatic stay’s setoff bar.


In re Holyoke Nursing Home, Inc., 372 F.3d 1 (1st Cir. 2004)