Health Reform WK-EDGE HHS debt setoff not subject to state court subject matter jurisdiction
Thursday, October 4, 2018

HHS debt setoff not subject to state court subject matter jurisdiction

By Matt Pavich, J.D.

The practice of HHS to set off debts owed to it by insurance companies should not be subjected to state court subject matter jurisdiction because federal law and caselaw urged the removal of an ancillary issue to federal court, the Seventh Circuit Court of Appeals has ruled. The appellate court also held that the district court erred in ruling that it would abstain on the issue (Hammer v. U.S., September 25, 2018, St. Eve, A.).

Background. HHS owed millions of dollars to the now-defunct insurance company, Land of Lincoln, which itself owed millions to HHS. The debts were related to the Affordable Care Act’s (ACA) three premium-stabilization programs: the Risk Adjustment, Risk Corridor, and Reinsurance programs, all of which were designed to redistribute money among insurance companies and thereby mitigate each company’s exposure to risks in the market.

HHS chose to set off its own debt payments by first paying down the company’s debt. The Director of the Illinois Department of Insurance, Land of Lincoln’s appointed liquidator, argued that the setoff violated an Illinois court order barring creditors from setting off money owed to the company without prior court approval. The Director asked for a declaration that HHS violated the order. HHS removed to federal district court, arguing that the state court lacked jurisdiction over the federal government. The district court remanded to state court, finding that removal would harm the state’s efforts to establish a uniform rehabilitation system centralized in specialized state courts. HHS appealed.

Civil action. The federal officer and agency removal statute, 28 U.S.C. §1442, allows removal of civil actions against, or directed to the removing party, who must be one of the entities listed, and the action must be either for, or related to any act under color of such office. The appellate court ruled that the district court incorrectly found that it lacked subject matter jurisdiction under the statute because the underlying motion was not directed at an individual officer and was unrelated to discovery and was, therefore, not a civil action under the statute. The appellate court stated that the definition of "civil action" is independent of the nature of the party that seeks to remove the action. Additionally, the statute does not limit removal to discovery disputes. The Director sought a declaratory order regarding the state’s right to money and that order was an ancillary proceeding to the HHS involvement. It was, therefore a civil action.

Directed to. The court also found that the motion was directed to HHS within the meaning of the statute. The Director served HHS with a notice of the motion and HHS is required to respond.

Colorable federal defense. The court found that HHS had a colorable federal defense, rejecting the Director’s argument that the liquidation proceeding did not implicate sovereign immunity because it was a proceeding in rem. The court noted that there is no general in rem exception to sovereign immunity. Furthermore, in the instant case, the Director sought to recover a sum of money, not a specific amount. The Director also argued that ancillary issues may not implicate sovereign immunity. The court rejected that argument, finding that the Supreme Court has rejected the suggestion. The court therefore found that HHS had met the standard for removal.

Abstention argument. The appellate court further ruled that the district court erroneously ruled that even if its interpretation of the statute were incorrect, it would abstain from hearing the case. The nature of the case was primarily federal; it involved two debts owed by and to HHS under a federal regulatory regime and the only application of state law to the case was whether HHS violated a state-court order. The court would have to answer "antecedent" federal questions in order to resolve the suit. Moreover, Congress has stated in Section 1442 that federal officers and the government require "the protection of a federal forum." The Seventh Circuit thus ruled that in the absence of any extraordinary circumstances, the HHS’ defense that it was not subject to state court subject matter jurisdiction and the court should not have abstained.

The Seventh Circuit also found that the district court focused too heavily on Illinois’ interests. HHS was offsetting the debts of more than twenty insurance companies. The appellate court found that "exposing" that practice to the laws of various states could have dire consequences for the insurance market. In contrast, removing the motion would not disturb the liquidation of Land of Lincoln.

The court therefore reversed and remanded the issue to the district court for further proceedings.

The case is No. 18-2523.

Attorneys: Leonard A. Gail (Massey & Gail LLP) for Jennifer Hammer. Lindsey Powell, U.S. Department of Justice, for U.S. Department of Health & Human Services.

Companies: U.S. Department of Health and Human Services

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