IN RE NUMED HOME HEALTH CARE INC., (Bankr.M.D.Fla. 2003)

PAUL M. GLENN, United States Bankruptcy Judge

THIS CASE came before the Court for hearing to consider the Motion to Alter or Amend Order Granting Post Modern's Motion for Distribution of Portion of Remaining Allocated Plan Funds. The Motion to Alter or Amend was filed by the United States of America (the USA).

The issue in this motion relates to a provision in an Order that requires a party to disgorge any excess distribution that it received pursuant to a prior Stipulated Order for Interim Distribution, "notwithstanding any right of setoff" to which that party might be entitled.

Background

The Debtor, Numed Home Health Care, Inc., filed a petition under chapter 11 of the Bankruptcy Code on November 1, 2000.

On August 16, 2001, the Court entered an Order Confirming Debtors' Third Amended Joint Plan of Reorganization. (Doc. 204). In the Third Amended Plan, Post Modern Medical Systems, Inc. (PMMS) is defined as the "Debtor-in-Possession Lender," or the entity that provided post-petition financing to the Debtor. The basic structure of the Plan is set forth in Article IX, which provides in part as follows:

ARTICLE IX. — MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN

9.1. Funding of Plan

Conditioned upon the entry of the Confirmation Order and the issuance of the New Stock in Reorganized NuMED to PMMS or its Assigns, as provided in Section 9.2 below, PMMS, or its assigns, will transfer some [sic] the sum of $1,450,000.00 to fund the Plan Fund. The Plan Fund shall be in the form of (a) a loan to be made by PMMS and/or an institutional third party lender to the Reorganized Debtors (the "Plan Loan"); and (b) an equity contribution to Reorganized NUMED. . . .

9.2 Issuance of Stock in Reorganized NuMED

. . .

. . . It is anticipated that after the Effective Date, the Debtor-in-Possession Lender may merge or otherwise be combined into Reorganized NuMED and/or additional funds may be invested by third parties into the surviving reorganized entity, however, there is no assurance that any such investment will be made. It is anticipated that Reorganized NUMED will be the surviving corporation.

(Doc. 202, Final Version of Confirmed Third Amended Plan of Reorganization, pp. 31-33).

Additionally, the Third Amended Plan provides as follows with respect to the "Plan Funds:"

ARTICLE VI. THE PLAN FUNDS

6.1. Payment of HCFA and Deposit of Remaining Allocated Plan Funds

At the Closing, the sum of $100,000.00 shall be paid from the Plan Funds to the holders of the Class 7 Claims (HHS and HCFA).

The Remaining Allocated Plan Funds shall be deposited into Plan Accounts maintained at a law firm, bank or trust company located in Tampa, Florida, that is acceptable to Heller, the IRS, and PMMS, or approved by the Bankruptcy Court. The custodian of such funds shall hold the Remaining Allocated Plan Funds in a fiduciary escrow agent capacity and shall disburse such funds only in accordance with the provisions of this Plan and (i) upon written joint instructions from Heller, the IRS, and PMMS, or (ii) upon Order of the Bankruptcy Court. The Allowed Secured Claims of Heller, the IRS, PMMS, and any Class 5 secured creditors shall attach to the Remaining Allocated Plan Funds to the same extent, and with the same validity and priority as the creditor had upon the Assets of the Debtors as of the Petition Date, except as modified by the Cash Collateral Order and DIP Financing Order.

(Doc. 202, Final Version of Confirmed Third Amended Plan of Reorganization, pp. 26-27).

On November 16, 2001, the Court entered a Stipulated Order Providing for Interim Distribution of Remaining Allocated Plan Funds. (Doc. 237). The Stipulated Order expressly states that it was entered after the parties advised the Court "that Heller, the USA, and PMMS had agreed to the entry of an order directing an interim distribution of a portion of the Remaining Allocated Plan Funds to be deposited into an escrow account (the "Escrow Account") established pursuant to and in furtherance of Article VI of the Debtors' Joint Third Amended Plan of Reorganization." The Stipulated Order then provided that the following distributions would be made from the Remaining Allocated Plan Funds before they were deposited into the Escrow Account:

(a) The Remaining Allocated Plan Funds allocated to Parke Home Health Care, Inc. in the amount of $153,050.00 shall be released and transferred to Heller. . . .

(b) The Remaining Allocated Plan Funds allocated to Silver Moves, Inc. d/b/a Florida Nursing Services in the amount of $50,842.00 shall be released and transferred to the USA. . . .

(c) The Remaining Allocated Plan Funds allocated to Whole Person Home Health Care of Florida, Inc. d/b/a Total Professional Health Care in the amount of $473,200.00 shall be disbursed as follows:

(i) $125,000.00 representing the Administrative Carve Out shall be released and transferred to the law firm of Trenam, Kemker . . . on account of their approved Professional Fee Claim.

(ii) The amount of $175,000.00 shall be released and transferred to PMMS . . . on account of its claim as Debtor in Possession Lender.

(iii) The remainder to the USA.

2. Participation by Heller, the USA, and PMMS in these interim distributions by stipulation shall not constitute a waiver of their respective liens, claims, interests and/or any defenses against the Debtors, against each other, and/or against the Allocated Plan Funds. All amounts distributed to Heller. PMMS and the USA pursuant to this Stipulated Order are subject to disgorgement consistent with the final and non-appealable determinations of a court of competent jurisdiction in resolution of the IRS Adversary Proceeding. or an approved compromise thereof.

(Doc. 237, Stipulated Order Providing for Interim Distribution of Remaining Allocated Plan Funds, pp. 2-4) (Emphasis supplied).

PMMS subsequently filed a Motion for Entry of Order Providing for Distribution or for Disgorgement of Portion of Remaining Allocated Plan Funds. (Doc. 406). In the Motion, PMMS asserted that:

[P]ursuant to the Closing Order, of the amounts advanced by PMMS as Additional DIP Financing, the amount of $113,291.00 representing the actual reduction of the Heller debt, would be entitled to the priorities granted to PMMS for DIP Financing under prior DIP Financing Orders entered by the Court. Those DIP Financing Orders provided PMMS with a first priority lien and security interest in all of the assets of the Debtors, including accounts receivable, superior to all other liens and interests in such assets, except with respect to any pre-petition liens securing the Heller debt or any replacement liens granted by the Court as adequate protection of Heller's interest in cash collateral used by the Debtors.

Consequently, PMMS requested "the disbursement m the amount of $113,291.00 from the remaining Allocated Plan Funds as its final distribution of funds from the Remaining Allocated Plan Funds." (¶ 9). Additionally, however, PMMS made the following request in its Motion:

To the extent any party objects to the disbursement of such amounts from the Plan Fund (presumably Heller), PMMS seeks the entry of an Order directing the IRS to disgorge the funds it received pursuant to the Prior Distribution Order, as such funds were subject to the superior interest of PMMS.

(Doc. 406, Motion for Entry of Order Providing for Distribution or for Disgorgement of Portion of Remaining Allocated Plan Funds, ¶ 10).

Heller Healthcare Finance, Inc. (Heller) filed a Limited Opposition to Postmodern's Motion. (Doc. 409). In its Objection, Heller asserted that the amount of the Remaining Allocated Plan Funds currently equals the sum of $305,436.00, and that Heller's claim to the Fund exceeds that amount. Heller therefore contended that PMMS's claim should not be paid from the Remaining Allocated Funds until after Heller's claim to those funds has been resolved. Finally, Heller asserted that "[i]f PMMS is entitled to be paid now, an order of disgorgement should be entered requiring the Internal Revenue Service to return Allocated Plan Funds previously received by it."

Following a hearing on the matter, the Court entered an Order Granting Post Modern's Motion for Distribution of Portion of Remaining Allocated Plan Funds. (Doc. 414). The Order contained the following provisions:

1. The Court authorized and directed the Escrow Agent to release the amount of $113,291.00 from the Remaining Allocated Plan Funds to PMMS.

2. Following the resolution of the adversary proceeding involving the United States of America, if it is determined that a party has received an amount in excess of its entitlement, the party receiving the excess distribution shall disgorge the excess amount "notwithstanding any right of setoff for any other claims the Disgorging Party may assert against any other party."

(Doc. 414, Order Granting Post Modern's Motion for Distribution of Portion of Remaining Allocated Plan Funds, ¶¶ 2, 3).

The United States of America filed a Motion to Alter or Amend the Order Granting Post Modern's Motion for Distribution of Portion of Remaining Allocated Plan Funds. (Doc. 415). Specifically, the USA requests that the Order be modified to omit the language contained in paragraph 3 to the extent that it provides that a party who has received an excess distribution must disgorge the excess amount "notwithstanding any right of setoff" to which that party might be entitled. The USA contends that it has a statutory right of setoff against Heller pursuant to 31 U.S.C. § 3728, and that this Court lacks jurisdiction to determine the relative tax liabilities as between two nondebtor parties. The USA asserts, therefore, that the Court cannot enjoin it from exercising its statutory right of setoff against Heller Healthcare Finance, Inc., a nondebtor.

Discussion

In the Stipulated Order Providing for Interim Distribution of Remaining Allocated Plan Funds (Doc. 237), the Court authorized distributions to the USA of two sums.

1. First, the Order provides that the "Remaining Allocated Plan Funds allocated to Silver Moves, Inc. d/b/a Florida Nursing Services in the amount of $50,842.00 shall be released and transferred to the USA."

2. Second, the Order provides that the "Remaining Allocated Plan Funds allocated to Whole Person Home Health Care of Florida, Inc. d/b/a Total Professional Health Care" shall be disbursed to the USA in the amount of $173,200.00. ($473,200.00 minus $125,000.00 to Trenam, Kemker minus $175,000.00 to PMMS = $173,200.00 to the USA).

Only the two distributions described above, therefore, are subject to the potential disgorgement that is at issue by virtue of the USA's Motion to Alter or Amend the Order Granting Post Modern's Motion for Distribution.

The potential disgorgement by the USA, however, is dependent solely on the outcome of the adversary proceeding to determine the validity, priority, and extent of liens as between the USA and Heller. The Stipulated Order Providing for Interim Distribution of Remaining Allocated Plan Funds, for example, states that "[a]ll amounts distributed to Heller, PMMS, and the USA pursuant to this Stipulated Order aresubject to disgorgement consistent with the final and non-appealable determinations of a court of competent jurisdiction in resolution of the IRS Adversary Proceeding, or an approved compromise thereof." (Doc. 237, ¶ 2) (Emphasis Supplied). Additionally, the Order Granting Post Modern's Motion for Distribution of Portion of Remaining Allocated Plan Funds stated that "[c]onsistent with paragraph 2 of this Court's Prior Interim Distribution Order, if, by this or prior Order of this Court, if a party has received an amount in excess of its entitlement (an "Excess Distribution") as determined by a final and non-appealable determination of a court of competent jurisdiction in resolution of the IRS Adversary Proceeding or an approved compromise thereof ("Final Determination"), the party having received such Excess Distribution ("Disgorging Party") shall disgorge immediately such Excess Distribution. . . ." (Doc. 414, ¶ 3) (Emphasis Supplied). Only one event, therefore, triggers an obligation by Heller, PMMS, or the USA to disgorge some or all of a prior disbursement: the determination in "the IRS Adversary Proceeding" that a party had received an excess distribution.

Contemporaneously with this Order, the Court is entering its Findings of Fact, Conclusions of Law, and Memorandum Opinion in the adversary proceeding styled United States of America v. Heller Healthcare Finance, Inc., Adv. No. 01-59 (the "IRS Adversary Proceeding").

In the Opinion, the Court determines that the USA holds a first priority tax lien with respect to the accounts receivable of Whole Person Home Health Care of Florida, Inc. This conclusion is based on the fact that "Whole Person — Florida" was not a party to the Loan and Security Agreement with Heller, and Heller asserts no interest in the assets of "Whole Person — Florida." It appears, therefore, that the distribution received by the USA in the amount of $173,200.00 on account of funds attributed to Whole Person Home Health Care of Florida, Inc. is not subject to disgorgement as an excess disbursement.

In the Opinion, the Court also determines that the USA "holds a first priority tax lien on the accounts receivable of Silver Moves, Inc. pursuant to the notice of federal tax lien filed on February 4, 2000, less a credit in the amount of $50,206.76 for payment previously received." This conclusion was based on Heller's acknowledgement that the tax lien evidenced by the Notice filed on February 4, 2000, has priority over Heller's claim, and was also based on Heller's further contention that the tax lien was satisfied by virtue of the distribution of the $50,842.00 pursuant to the Stipulated Order. It appears, therefore, that the distribution received by the USA in the amount of $50,206.76 (or $50,842.00) on account of funds attributed to Silver Moves, Inc. is not subject to disgorgement as an excess disbursement.

In the Motion under consideration, the USA requests that the Order Granting Post Modern's Motion for Distribution be modified to omit the language contained in paragraph 3 that provides that a party who has received an excess distribution must disgorge the excess amount "notwithstanding any right of setoff" to which that party might be entitled. (Doc. 414, ¶ 3). The USA contends that the provision impermissibly enjoins it from exercising its statutory right of setoff against Heller.

The provision in the order pertaining to a party's setoff rights is only triggered in the event that the party is directed to disgorge an excess distribution. As shown above, however, the Court has determined in the "IRS Adversary Proceeding" that the USA was entitled to the distributions that it received on account of Whole Person — Florida and Silver Moves, Inc. Neither of the disbursements that were made to the USA pursuant to the Stipulated Order was excessive, and neither distribution should be disgorged. Consequently, the provision regarding a "disgorging party's" setoff rights, as contained in paragraph 3 of the Order Granting Post Modern's Motion for Distribution, is not invoked with respect to the distributions received by the USA.

Since the condition precedent for operation of the setoff provision will not be met in this case, the Motion to Alter or Amend the Order Granting Post Modern's Motion for Distribution should be denied as moot.

Accordingly:

IT IS ORDERED that the Motion by United States of America to Alter or Amend Order Granting Post Modern's Motion for Distribution of Portion of Remaining Allocated Plan Funds is denied as moot.