Health Reform WK-EDGE MCO’s sole shareholder unable to recover damages after forced liquidation
Tuesday, September 19, 2017

MCO’s sole shareholder unable to recover damages after forced liquidation

By Jeffrey H. Brochin, J.D.

A managed care organization’s (MCO) sole shareholder was barred from bringing a suit before the D.C. District Court to recover damages after the D.C. Superior Court allowed a rehabilitation action that resulted in the MCO’s liquidation. According to the district court, the D.C. Healthcare Systems, Inc. (DCHSI) was considered an effective "party" to the prior proceedings involving D.C. Chartered Health Plan, Inc. (Chartered) (despite being characterized as a non-party by the Superior Court judge), and therefore the case could not proceed to a federal court inferior to the U.S. Supreme Court under jurisdictional rules (D.C. Healthcare Systems, Inc. v. District of Columbia, September 6, 2017, Leon, R.).

Background: For over a decade, Chartered operated as a managed care organization (MCO) contracted with the District of Columbia Department of Health Care Finance (DHCF) to provide healthcare services to low-income residents. DHCF set the reimbursement rates at which it would pay Chartered. Medicaid eligibility standards changed under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) led DHCF to transfer 23,000 residents to the federally-subsidized Medicaid program, and which resulted in a skyrocketing of Chartered’s costs. On more than one occasion, Chartered notified DHCF that the move would have a severe adverse financial impact on Chartered and in October 2012, the D.C. Commissioner of Insurance, Securities and Banking filed an emergency petition in the D.C. Superior Court seeking to place Chartered into rehabilitation under D.C.’s bankruptcy code. This move came after various assurances by the Commissioner’s consultant that if the consultant were appointed as Rehabilitator, he would consult with DCHSI as Chartered’s sole shareholder in the reorganization and would otherwise extend various benefits to DCHSI.

Instead, the rehabilitator effectively liquidated Chartered and transferred its assets to another MCO. After the Superior Court entered the reorganization order, DCHSI filed a motion for reconsideration which was rejected by the court, which found that DCHSI was not a party in the proceedings. In August 2016, DCHSI filed its petition in federal court alleging that senior D.C. officials had engaged in a scheme to take Chartered’s assets from DCHSI.

Rooker-Feldman doctrine. In dismissing DCHSI’s complaint for lack of subject matter jurisdiction, the federal court relied upon a ruling known as the Rooker-Feldman doctrine. The doctrine is drawn from 28 U.S.C. § 1257 and channels all federal review of judicial decisions of state (and D.C.) courts of last resort to the U.S. Supreme Court. The doctrine makes clear that inferior federal courts lack jurisdiction over such decisions, and it is confined to cases brought by state-court losers complaining of injuries by state-court judgments rendered before district court proceedings have commenced.

The doctrine’s three criteria. The doctrine bars federal jurisdiction when three criteria are met: (1) the party against whom it is invoked must have been a party to the underlying state-court proceeding; (2) the federal action must complain of injuries caused by state-court judgments; and (3) the injurious state-court judgment must have been rendered before the district court proceedings have been commenced.

DCHSI objected to the imposition of the doctrine’s jurisdictional bar, arguing that the first requirement of the doctrine was never met because DCHSI was never a party to the state-court proceedings. However, the court disagreed, noting that DCHSI had been a party in all relevant respects and that it had in fact appeared as a "party in interest" and was addressed as such by the court. The district court also found that DCHSI was effectively requesting that a state court’s actions be undone, meeting the second element of the doctrine. The last element was easily satisfied by the timeline of events in the lower court. The meeting of the three elements resulted in dismissal.

The case is Civil Case No. 16-1644 (RJL).

Attorneys: Lisa Annette Bell (PCT Law Group, PLLC) and Mark Andrew Grannis (Harris, Wiltshire & Grannis LLP) for D.C. Healthcare Systems, Inc. Fernando Amarillas, Office of the Attorney General, for the District of Columbia.

Companies: D.C. Healthcare Systems, Inc.

Cases: CaseDecisions AgencyNews ManagedCareNews MedicaidNews MedicaidExpansionNews DistrictofColumbiaNews

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