Gerhart et al v. Department of Health And Human Services et al

BRIEF in support of defendants' motion to dismiss

S.D. IowaSeptember 8, 2016

IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF IOWA CENTRAL DIVISION NICK GERHART, in his capacity as Liquidator : of CoOportunity Health, Inc., and DAN : WATKINS, in his capacity as Special Deputy : Liquidator of CoOportunity Health, Inc., : : Plaintiffs, : Case No. 4:16-CV-00151 : v. : Oral Argument Requested : U.S. DEPARTMENT OF HEALTH AND : HUMAN SERVICES, CENTERS FOR : MEDICARE & MEDICAID SERVICES, : et al., : : Defendants. : THE UNITED STATES’ BRIEF IN SUPPORT OF ITS MOTION TO DISMISS BENJAMIN C. MIZER Principal Deputy Assistant Attorney General Civil Division KEVIN E. VANDERSCHEL United States Attorney WILLIAM C. PURDY Assistant United States Attorney RUTH A. HARVEY KIRK T. MANHARDT TERRANCE A. MEBANE SERENA M. ORLOFF CHARLES E. CANTER United States Department of Justice Attorneys for the United States Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 1 of 69 i TABLE OF CONTENTS INTRODUCTION ............................................................................................................................ 1 BACKGROUND ............................................................................................................................... 3 I. The Affordable Care Act....................................................................................................... 3 A. Overview ................................................................................................................................ 3 B. The CO-OP Program .............................................................................................................. 4 C. The “3Rs” Programs ............................................................................................................... 6 1. Transitional Reinsurance ............................................................................................ 6 2. Permanent Risk Adjustment ....................................................................................... 7 3. Temporary Risk Corridors .......................................................................................... 9 D. HHS’s Payment and Collection Process ............................................................................... 11 II. CoOportunity Health ........................................................................................................... 12 III. This Case ............................................................................................................................. 14 ARGUMENT .................................................................................................................................. 14 I. Legal Standards ................................................................................................................... 14 A. Standard of Review Under Rule 12(b)(1)............................................................................. 14 B. Standard of Review Under Rule 12(b)(6)............................................................................. 15 II. The Offset Claims Should Be Dismissed for Lack of Jurisdiction and on the Merits ........ 15 A. The Court Lacks Jurisdiction over the Offset Claims Because the United States Has Not Waived Its Sovereign Immunity for Monetary Disputes in the District Courts .................................................................................................................................. 16 1. The APA Does Not Waive Sovereign Immunity for Monetary Disputes ................ 16 2. The Offset Claims Seek Monetary Relief Solely Within the Jurisdiction of the Court of Federal Claims………………………………………..17 B. The Court Lacks Jurisdiction to Issue Declaratory or Injunctive Relief Regarding the United States’ Use of Setoff to Collect Taxes ................................................................ 21 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 2 of 69 ii C. The Offset Claims Should Be Dismissed on the Merits ....................................................... 22 1. Federal and State Law Recognize HHS’s Offset and Netting Rights ...................... 23 2. Risk Corridors Obligations Do Not Affect the United States’ Right of Offset ........ 27 3. The Liquidators’ Remaining Arguments Against Offset Are Meritless. .................. 28 II. The Risk Adjustment Claim Should Be Dismissed for Lack of Jurisdiction...................... 31 IV. The Choice of Law Claim Should Be Dismissed for Lack of Jurisdiction ... and on the Merits …………………………………………………………………………32 A. The Choice of Law Claim Improperly Seeks an Advisory Opinion .................................... 32 B. The Choice of Law Claim Should Be Dismissed on the Merits ........................................... 34 CONCLUSION ............................................................................................................................... 37 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 3 of 69 iii TABLE OF AUTHORITIES CASES Ashcroft v. Iqbal, 556 U.S. 662 (2009) ...................................................................................................................... 15 Ashley v. U.S. Dep’t of Interior, 408 F.3d 997 (8th Cir. 2005) ........................................................................................................ 29 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ...................................................................................................................... 15 Beloit Corp. v. C3 Datatec, Inc., 78 F.3d 586 (7th Cir. 1996) .......................................................................................................... 17 Berger v. Cas’ Feed Store, Inc., 543 N.W.2d 597 (Iowa 1996) ....................................................................................................... 23 Bob Jones Univ. v. Simon, 416 U.S. 725 (1974) ...................................................................................................................... 22 Bowen v. Massachusetts, 487 U.S. 879 (1988) ...................................................................................................................... 19 Boyle v. United Tech. Corp., 487 U.S. 500 (1988) ...................................................................................................................... 34 Braden v. Wal-Mart Stores, Inc., 588 F.3d 585 (8th Cir. 2009) ........................................................................................................ 15 Brazos Elec. Power Co-op., Inc. v. United States, 144 F.3d 784 (Fed. Cir. 1998)....................................................................................................... 20 Briggs v. United States, 564 F. Supp. 2d 1087 (N.D. Cal. 2008) ........................................................................................ 19 Cal. Ins. Gty. Ass’n v. Burwell, No. 15-cv-1113, 2016 WL 1050190 (C.D. Cal. Mar. 16, 2016)................................................... 25 Cass Cty. v. United States, 570 F.2d 737 (8th Cir. 1978) .................................................................................................. 32, 34 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 4 of 69 iv Cathedral Square Partners Ltd. P’ship v. S. Dakota Hous. Dev. Auth., 679 F. Supp. 2d 1034 (D.S.D. 2009) ...................................................................................... 16, 17 Cherry Cotton Mills v. United States, 327 U.S. 536 (1946) ...................................................................................................................... 29 Christopher Village, L.P. v. United States, 360 F.3d 1319 (Fed. Cir. 2004)..................................................................................................... 17 Citizens Bank of Md. v. Strumpf, 516 U.S. 16 (1995) .................................................................................................................. 22, 30 City of Houston v. Dep’t of Hous. & Urban Dev., 24 F.3d 1421 (D.C. Cir. 1994) ...................................................................................................... 28 Clemons v. Crawford, 585 F.3d 1119 (8th Cir. 2009) ...................................................................................................... 15 Clinton v. Goldsmith, 526 U.S. 529 (1999) ...................................................................................................................... 20 Consol. Edison Co. of New York v. U.S. Dep’t of Energy, 247 F.3d 1378 (Fed. Cir. 2001)..................................................................................................... 16 Cty. of Suffolk v. Sebelius, 605 F.3d 135 (2d Cir. 2010).......................................................................................................... 28 Dalton v. Sherwood Van Lines, Inc., 50 F.3d 1014 (Fed. Cir. 1995)....................................................................................................... 18 Enochs v. Williams Packing & Navigation Co., 370 U.S. 1 (1962) .......................................................................................................................... 21 Geston v. Anderson, 729 F.3d 1077 (8th Cir. 2013) ...................................................................................................... 35 Golden v. Zwickler, 394 U.S. 103 (1969) ................................................................................................................ 32, 33 Gonzales & Gonzales Bonds & Ins. Agency, Inc. v. Dep’t of Homeland Sec., 490 F.3d 940 (Fed. Cir. 2007)................................................................................................. 17, 18 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 5 of 69 v Grady v. United States, No. 13-15C, 2013 WL 4957344 (Ct. Fed. Cl. July 31, 2013)....................................................... 29 Gunter v. Farmers Ins. Co., 736 F.3d 768 (8th Cir. 2013) ........................................................................................................ 35 Humana Inc. v. Forsyth, 525 U.S. 299 (1999) ...................................................................................................................... 36 In re Agriprocessors, Inc., 547 B.R. 292 (N.D. Iowa 2016) .............................................................................................. 24, 29 In re Brittenum & Assocs., Inc., 868 F.2d 272 (8th Cir. 1989) ........................................................................................................ 29 In re Liquidation of Home Ins. Co., 953 A.2d 443 (N.H. 2008) ...................................................................................................... 23, 28 In re Liquidation of Home Ins. Co., 972 A.2d 1019 (N.H. 2009) .......................................................................................................... 24 In re Liquidation of Realex Grp. N.V., 210 A.D.2d 91 (N.Y. App. Div. 1994) ......................................................................................... 24 In re Nuclear Imaging Systems, Inc., 260 B.R. 724 (Bankr. E.D. Pa. 2000) ........................................................................................... 21 In re SubMicron Sys. Corp., 432 F.3d 448 (3d Cir. 2006).......................................................................................................... 30 In re Turner, 84 F.3d 1294 (10th Cir. 1996) ...................................................................................................... 29 Ishler v. Comm’r, 442 F. Supp. 2d 1189 (N.D. Ala. 2006) ........................................................................................ 22 Jader v. Principal Mut. Life Ins. Co., 925 F.2d 1075 (8th Cir. 1991) ...................................................................................................... 20 Jewish Ctr. for Aged v. U.S. Dep’t of Hous. & Urban Dev., No. 406-CV-1739 JCH, 2007 WL 763928 (E.D. Mo. Mar. 9, 2007) ..................................... 20, 26 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 6 of 69 vi King v. Burwell, __ U.S. __, 135 S. Ct. 2480 (2015) ................................................................................................. 3 Lane v. Pena, 518 U.S. 187 (1996) ...................................................................................................................... 16 Matter of Midland Ins. Co., 590 N.E.2d 1186 (1992)................................................................................................................ 28 McBride Cotton & Cattle Corp. v. Veneman, 116 F. App’x 89 (9th Cir. 2004) ................................................................................................... 18 McCarty v. S. Farm Bureau Cas. Ins. Co., 758 F.3d 969 (8th Cir. 2014) ........................................................................................................ 34 Meyer Med. Physicians Grp., Ltd. v. Health Care Serv. Corp., 385 F.3d 1039 (7th Cir. 2004) ...................................................................................................... 28 Mohawk Airlines, Inc. v. Civil Aeronautics Bd., 329 F.2d 894 (D.C. Cir. 1964) ...................................................................................................... 18 Nat’l Federation of Independent Businesses v. Sebelius, __ U.S. __, 132 S. Ct. 2566 (2012) ............................................................................................... 20 Osborn v. United States, 918 F.2d 724 (8th Cir. 1990) ........................................................................................................ 14 Owner-Operator Indep. Drivers Ass’n, Inc. v. United States Dep’t of Transp., No. 15-2090, 2016 WL 4087235 (8th Cir. Aug. 2, 2016) ............................................................ 31 O’Connell v. Mills, No. 13-15124, 2014 WL 354696 (E.D. Mich. Jan. 31, 2014) ...................................................... 18 Prudential Reinsurance Co. v. Superior Court, 3 Cal. 4th 1118 (1992) .................................................................................................................. 24 Rock Island Millwork Co. v. Hedges–Gough Lumber Co., 337 F.2d 24 (8th Cir. 1964) .......................................................................................................... 14 Scheckel v. I.R.S., No. C03-2045 LRR, 2004 WL 1771063 (N.D. Iowa June 18, 2004) ........................................... 26 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 7 of 69 vii Scott v. Armstrong, 146 U.S. 499 (1892) ...................................................................................................................... 24 Sec. & Exch. Comm’n v. Credit Bancorp, Ltd., 297 F.3d 127 (2d Cir. 2002).......................................................................................................... 21 Settlement Funding, LLC v. Garcia, 533 F. Supp. 2d 685 (W.D. Tex. 2006)......................................................................................... 25 Singleton v. Mathis, 284 F.2d 616 (8th Cir. 1960) ........................................................................................................ 21 St. Louis Effort for AIDS v. Huff, 782 F.3d 1016 (8th Cir. 2015) ...................................................................................................... 35 St. Louis Effort for AIDS v. Huff, 996 F. Supp. 2d 798 (W.D. Mo. 2014) ......................................................................................... 36 Studley v. Boylston Nat. Bank, 229 U.S. 523 (1913) ...................................................................................................................... 23 Suburban Mortgage Assocs., Inc. v. U.S. Dep’t of Hous. & Urban Dev., 480 F.3d 1116 (Fed. Cir. 2007)..................................................................................................... 17 Telecare Corp. v. Leavitt, 409 F.3d 1345 (Fed. Cir. 2005)..................................................................................................... 17 Titus v. Sullivan, 4 F.3d 590 (8th Cir. 1993) ............................................................................................................ 14 TransAmerica Assurance Corp. v. Settlement Capital Corp., 489 F.3d 256 (6th Cir. 2007) .................................................................................................. 25, 26 Twin City Fire Insurance Co. v. Adkins, 400 F.3d 293 (6th Cir. 2005) ........................................................................................................ 25 United States Dep’t of Treasury v. Fabe, 508 U.S. 491 (1993) ...................................................................................................................... 36 United States v. DeQueen & E. R.R. Co., 271 F.2d 597 (8th Cir. 1959) ........................................................................................................ 23 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 8 of 69 viii United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979) .................................................................................................................. 2, 34 United States v. Mitchell, 463 U.S. 206 (1983) ...................................................................................................................... 20 United States v. Munsey Trust Co. of Washington, D.C., 332 U.S. 234 (1947) ............................................................................................................ 2, 21, 23 United States v. Nordic Vill. Inc., 503 U.S. 30 (1992) ........................................................................................................................ 26 United States v. Rhode Island Ins. Insolvency Fund, 80 F.3d 616 (1st Cir. 1996) ..................................................................................................... 35, 36 United States v. Rural Elec. Convenience Co-op. Co., 922 F.2d 429 (7th Cir. 1991) ........................................................................................................ 26 United States v. Shaw, 309 U.S. 495 (1940) ...................................................................................................................... 26 United States v. Sherwood, 312 U.S. 584 (1941) ...................................................................................................................... 16 United States v. Tafoya, 803 F.2d 140 (5th Cir. 1986) ........................................................................................................ 23 United States v. U. S. Fid. & Guar. Co., 309 U.S. 506 (1940) ...................................................................................................................... 26 V S Ltd. P’ship v. Dep’t of Hous. & Urban Dev., 235 F.3d 1109 (8th Cir. 2000) ................................................................................................ 14, 16 Wiand v. Meeker, 572 F. App’x 689 (11th Cir. 2014) ............................................................................................... 28 STATUTES 26 U.S.C. § 7421 .............................................................................................................................. 20 28 U.S.C. § 1292 .............................................................................................................................. 17 28 U.S.C. § 1651 .............................................................................................................................. 20 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 9 of 69 ix 28 U.S.C. § 2201 ........................................................................................................................ 20, 22 31 U.S.C. § 1341 .............................................................................................................................. 27 31 U.S.C. § 3713 ........................................................................................................................ 33, 36 42 U.S.C. § 18021 .............................................................................................................................. 4 42 U.S.C. § 18041 .................................................................................................................... 3, 4, 36 42 U.S.C. § 18042 .................................................................................................................... 4, 5, 30 42 U.S.C. § 18061 ........................................................................................................................ 6, 29 42 U.S.C. § 18062 .......................................................................................................................... 6, 9 42 U.S.C. § 18063 .................................................................................................................. 6, 7, 8, 9 42 U.S.C. § 18071 .............................................................................................................................. 3 42 U.S.C. §§ 300gg ........................................................................................................................ 3, 6 42 U.S.C. §§ 300gg-1 ..................................................................................................................... 3, 6 5 U.S.C. § 701 .................................................................................................................................... 1 5 U.S.C. § 702 .................................................................................................................................. 16 5 U.S.C. § 704 .................................................................................................................................. 16 Pub. L. No. 111-148 ........................................................................................................................... 1 Pub. L. No. 113-235 ......................................................................................................................... 10 Pub. L. No. 114-113 ......................................................................................................................... 10 Iowa Code § 507C.30(1) .................................................................................................................. 23 RULES Fed. R. Civ. P. 12(b)(1) .................................................................................................................... 14 Fed. R. Civ. P. 12(b)(6) .................................................................................................................... 15 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 10 of 69 x REGULATIONS 42 C.F.R. § 401.607(a)(2) ................................................................................................................. 23 45 C.F.R. § 153.20 .............................................................................................................................. 8 45 C.F.R. §§ 153.220 .......................................................................................................................... 7 45 C.F.R. § 153.230 ............................................................................................................................ 6 45 C.F.R. § 153.310 .......................................................................................................................... 36 45 C.F.R. § 156.520 .................................................................................................................. 5, 6, 30 45 C.F.R. § 156.1215 ............................................................................................................ 11, 12, 23 45 C.F.R. §§ 147.104-147.110 ........................................................................................................... 6 OTHER AUTHORITIES 76 Fed. Reg. 77,392 .................................................................................................................... 4, 5, 6 78 Fed. Reg. 15,410 ............................................................................................................................ 7 78 Fed. Reg. 54,070 ............................................................................................................................ 4 78 Fed. Reg. 72,370…………………………………………………………………….………….11 79 Fed. Reg. 13,744 ............................................................................................................................ 8 79 Fed. Reg. 30,240 .......................................................................................................................... 10 80 Fed. Reg. 10,750 ..................................................................................................................... 8, 10 81 Fed. Reg. 12,204 ............................................................................................................................ 8 CMS Summary Report on Transitional Reinsurance Payments and Permanent Risk Adjustment Transfers for the 2014 Benefit Year (June 30, 2015) ………………………………………...6, 8, 12 CMS Summary Report on Transitional Reinsurance Payments and Permanent Risk Adjustment Transfers for the 2015 Benefit Year (June 30, 2016) ………………………………………...7, 8, 13 Cong. Rec. Vol. 160, No. 151—Book II, H9838 (Dec. 11, 2014)…………………………………10 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 11 of 69 xi CMS, Risk Corridors Payments for the 2014 Benefit Year (November 19, 2015)………………...11 Congressional Budget Office, Updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act (April 2014)………………………………… ….....…......29 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 12 of 69 1 INTRODUCTION Iowa Insurance Commissioner Nick Gerhart and Dan Watkins (collectively, “Plaintiffs” or the “Liquidators”) bring this case in their capacity as liquidators of the estate of CoOportunity Health, Inc. (“CoOportunity”), a defunct health insurance company. The Liquidators—whose role is to oversee the distribution of CoOportunity’s assets in Iowa state court—seek an order (1) enjoining the United States from offsetting money streams owed to and from CoOportunity under the Patient Protection and Affordable Care Act, Pub. L. No. 111-148 (March 23, 2010) (the “Act” or “ACA”) and other federal laws, (2) declaring that Iowa state law, rather than federal law, applies to the United States’ rights in the liquidation proceeding, and (3) enjoining the Department of Health and Human Services (“HHS”) from applying its methodology for determining amounts due under section 1343 of the ACA, which established a program known as “risk adjustment.” Although these claims take various forms, in essence, they seek to force HHS to pay amounts Plaintiffs claim are owed to the estate under ACA programs while disregarding or nullifying debts the estate owes to the government under the same and related programs. The Liquidators’ claims fail both at the jurisdictional threshold and on the merits, and they should be dismissed. First, the Administrative Procedure Act, 5 U.S.C. § 701 et seq., on which the Liquidators base jurisdiction, waives the United States’ sovereign immunity only for claims seeking relief other than money damages and for which there is no other adequate remedy in a court. Notwithstanding the Liquidators’ efforts to cast their claims in non-monetary terms, they present a quintessential monetary dispute for which an adequate remedy is available, if at all, in the Court of Federal Claims. Indeed, the very definition of Plaintiffs’ roles as liquidators of the estate illustrates that their case is not about policies or programs but about assets and liabilities. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 13 of 69 2 The Court of Federal Claims is not only the proper court to resolve such disputes, it is the only court capable of issuing the relief the Liquidators seek. Sovereign immunity thus prevents the Liquidators from bringing their claims in this Court. Second, the Liquidators’ principal claim—that the United States is prohibited from exercising offset and “netting” (a form of offset)—fails on the merits. It is well-established that “[t]he government has the same right ‘which belongs to every creditor, to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him.’” United States v. Munsey Trust Co. of Washington, D.C., 332 U.S. 234, 239 (1947) (citation omitted). The Liquidators do not argue otherwise. Rather, their proffered rationale for enjoining the United States from conducting offset is the existence of an Iowa state court order prohibiting offset “without further order of this Court.” But because firmly established principles of sovereign immunity preclude the application of that order to the United States, the order cannot prevent the United States from exercising its lawful right of offset. Third, the Liquidators’ claim that state law, rather than federal law, must be applied to the United States’ rights in the liquidation proceeding fails to establish an Article III case or controversy. Put simply, federal law and state law are in accord in authorizing offset, and none of the other disagreements at issue turn on whether federal or state law is applied. Thus, it is both unnecessary and impermissible to reach the question of whether state law applies to the United States’ rights in the liquidation proceeding. If, however, the Court reaches that issue, the claim fails on the merits because the Supreme Court “has consistently held that federal law governs questions involving the rights of the United States arising under nationwide federal programs,” such as the ACA programs at issue here. United States v. Kimbell Foods, Inc., 440 U.S. 715, 726 (1979). The case should be dismissed. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 14 of 69 3 BACKGROUND I. The Affordable Care Act A. Overview Enacted in 2010, the ACA seeks to overcome “a long history of failed health insurance reform” by “adopt[ing] a series of interlocking reforms designed to expand coverage in the individual health insurance market” and decrease the cost of health care. King v. Burwell, __ U.S. __, 135 S. Ct. 2480, 2485 (2015). HHS is responsible for overseeing implementation of major provisions of the Act and for administering certain programs under the Act, either directly or in conjunction with states or other federal agencies. See 42 U.S.C. §§ 18041(a)(1), (b), (c)(1). HHS delegated many of its responsibilities under the ACA to the Centers for Medicare & Medicaid Services (“CMS”), which created the Center for Consumer Information and Insurance Oversight (“CCIIO”) to oversee implementation of the ACA. See https://www.cms.gov/cciio. For ease of reference, HHS, CMS and CCIIO are referred to collectively in this motion as “HHS.”1 The Act’s “key reforms” are threefold: (1) it prohibits health insurance companies from denying coverage or setting premiums based upon health status or medical history; (2) it requires individuals to maintain health insurance coverage or make a payment to the Internal Revenue Service (“IRS”); and (3) it provides federal insurance subsidies in the form of tax credits and cost sharing reductions to make insurance more affordable to eligible consumers. King, 135 S. Ct. at 2486 (citing 42 U.S.C. §§ 300gg, 300gg–1(a), 18081, 18082, 18091; 26 U.S.C. §§ 5000A, & 36B); see also 42 U.S.C. § 18071. To implement these reforms, the Act created Health Benefit 1 HHS, Secretary Burwell, and the United States of America are collectively referred to as the “United States.” Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 15 of 69 4 Exchanges (“Exchanges”), virtual marketplaces in each state whereby individuals and small groups can purchase pre-certified health insurance coverage. 42 U.S.C. §§ 18031-18041. Each plan offered through an Exchange must be a “Qualified Health Plan,” or “QHP,” meaning that it provides certain “essential health benefits” and complies with other requirements established by Congress and HHS. 42 U.S.C. § 18021. A state can elect to run its own Exchange (“State-Based Exchange”) or it can receive assistance from HHS in operating its Exchange (“Federally- facilitated Exchange”). See 42 U.S.C. § 18041; Program Integrity; Exchange, SHOP, and Eligibility Appeals, 78 Fed. Reg. 54,070, 54,071 (Aug. 30, 2013). The Act also created a number of temporary and permanent programs designed to facilitate and support the Act’s primary reforms by, inter alia, promoting administrative efficiency, increasing competition, stabilizing premiums, and promoting alternative business models among plans offered through the Exchanges. The following such programs are relevant to this case. B. The CO-OP Program In order to “improv[e] consumer choice and plan accountability,” “promote integrated models of care,” and “enhance competition” in the Exchanges, the Consumer Operated and Oriented Plan (“CO-OP”) program under section 1322 of the Act extended large subsidized loans to qualified applicants to support the creation of new consumer-governed, nonprofit health insurance issuers, or “CO-OPs,” in each state. Establishment of Consumer Operated and Oriented Plan (CO-OP) Program, 76 Fed. Reg. 77,392, 77,392 (Dec. 13, 2011); 42 U.S.C. § 18042(a)(1)-(2). There are two types of CO-OP loans: loans for start-up costs (“start-up loans”) and loans to enable CO-OPs to meet state regulatory solvency requirements (“solvency Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 16 of 69 5 loans”). 42 U.S.C. § 18042(b)(1).2 Start-up loans generally must be repaid within five years, and they accrue interest at one percent below the 5-year Treasury rate. 45 C.F.R. §§ 156.520(b)(1) & (c)(1). Solvency loans are a form of capital infusion intended to permit CO- OPs to meet insurance reserving or capital requirements of each state in which they are licensed to transact insurance. See 76 Fed. Reg. at 77,403. Consistent with this purpose, solvency loans must be “structured in a manner that ensures that the loan amount is recognized by State insurance regulators as contributing to the State-determined reserve requirements or other solvency requirements (rather than debt) consistent with the insurance regulations for the States in which the loan recipient will offer a CO–OP qualified health plan.” 45 C.F.R. § 156.520(a)(2); see also 76 Fed. Reg. at 77,403. Solvency Loans generally must be repaid within fifteen years, and they accrue interest at two percentage points below a benchmark Treasury rate. 45 C.F.R. §§ 156.520(b)(2) & (c)(2). As a condition of the loans, the Act required loan recipients to enter into a contractual agreement to comply with a comprehensive set of governance and funding restrictions. 42 U.S.C. § 18042(b)(2)(C)(i). Among these requirements, CO-OPs must agree to comply with all applicable federal law, including all requirements of the ACA, and applicable state insurance law. See Ex. 2 to Pls.’ Mot. for Prelim. Injunction (“Loan Agreement”) §§ 7.1, 13.1.5 [Dkt. No. 19]. CO-OPs that default on their loans are subject to all remedies available under the law to collect the debt, including “those found in the Federal Claims Collection Standards and 2 Section 1322 of the ACA refers to start-up loans as “loans” and solvency loans as “grants.” 42 U.S.C. § 18042(b)(1). HHS, however, has determined that, “[a]lthough the statute refers to Solvency Loans as ‘grants,’ they are loans because they must be repaid.” 76 Fed. Reg. at 77394. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 17 of 69 6 applicable Treasury regulations” and specifically including “administrative offset.” Loan Agreement § 19.12; 45 C.F.R. § 156.520. C. The “3Rs” Programs With the passage of the ACA, issuers of non-grandfathered individual and small group plans could no longer charge higher premiums or deny coverage based on an enrollee’s health. See 42 U.S.C. §§ 300gg, 300-gg; 45 C.F.R. §§ 147.104-147.110. To mitigate the pricing risk and incentives for adverse selection arising from these changes, the Act established three premium stabilization programs. Informally known as the “3Rs,” these programs began in 2014 and consist of reinsurance, risk adjustment, and risk corridors. See generally 42 U.S.C. §§ 18061-18063. Not all issuers are eligible to participate in the 3Rs programs, but CO-OPs are eligible for all three. 76 Fed. Reg. at 77,406. 1. Transitional Reinsurance The transitional reinsurance program is a temporary program created for the 2014-2016 benefit years. See 42 U.S.C. § 18061(b)(1). The program is designed to stabilize premiums by providing financial safeguards to insurance companies enrolling “high risk” policyholders, id., defined as those whose annual claims cost exceed a threshold or “attachment point.” 45 C.F.R. § 153.230(a). The program reimburses these issuers for a percentage of claims costs between the attachment point and a “cap” established by HHS. 45 C.F.R. § 153.230(c). The Act contemplated that states would administer their own reinsurance programs, 42 U.S.C. § 18061(a); however, it required HHS to establish standards for the program and also to operate such program on behalf of states that elected not to do so themselves. Id. §§ 18061(b), 18041(a)-(c). In 2014 and 2015, only Connecticut elected to establish its own reinsurance program, leaving HHS to administer the program on behalf of the rest of the states. See CMS Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 18 of 69 7 Summary Report on Transitional Reinsurance Payments and Permanent Risk Adjustment Transfers for the 2014 Benefit Year (June 30, 2015) (“2014 Reinsurance and Risk Adjustment Summary Report”), at 113; CMS Summary Report on Transitional Reinsurance Payments and Permanent Risk Adjustment Transfers for the 2015 Benefit Year (June 30, 2016) (“2015 Reinsurance and Risk Adjustment Summary Report”) (June 30, 2016) at 15.4 Under the program established by HHS, HHS collects mandatory annual contributions from health insurance issuers and group health plans and uses these contributions to, inter alia, pay qualified issuers for a percentage of their high-risk claims costs. 45 C.F.R. §§ 153.220, 153.230, 153.235. 2. Permanent Risk Adjustment Risk adjustment, established under section 1343 of the Act, is a permanent program intended to spread actuarial risk among plans to prevent adverse selection. See 42 U.S.C. § 18063. Risk adjustment is “based on the premise that premiums should reflect the differences in plan benefits and plan efficiency, not the health status of the enrolled population.” HHS Notice of Benefit and Payment Parameters for 2014, 78 Fed. Reg. 15410, 15,417 (March 11, 2013). Under the program, issuers of individual and small group plans that enroll high-risk (i.e., relatively “sicker”) policy holders are entitled to receive a payment, whereas issuers that enroll low-risk (i.e., relatively “healthier”) policyholders are assessed a charge. 42 U.S.C. § 18063(a). As with reinsurance, the ACA contemplated that each state would operate its own risk 3 Available at https://www.cms.gov/CCIIO/Programs-and-Initiatives/Premium- Stabilization-Programs/Downloads/RI-RA-Report-Draft-6-30-15.pdf 4 Available at https://www.cms.gov/CCIIO/Programs-and-Initiatives/Premium- Stabilization-Programs/Downloads/June-30-2016-RA-and-RI-Summary-Report-5CR- 063016.pdf Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 19 of 69 8 adjustment program pursuant to standards promulgated by HHS but provided that HHS would operate the program if the states did not. 42 U.S.C. §§ 18063(a), (b), 18041(c). Every state but Massachusetts initially deferred to HHS to operate its risk adjustment program (Massachusetts will do so in 2017). See 2014 Reinsurance and Risk Adjustment Summary Report, at 11; 2015 Reinsurance and Risk Adjustment Summary Report, at 15. HHS has set forth its risk adjustment methodology for each plan year since 2014 in a series of regulations. HHS Notice of Benefit and Payment Parameters for 2014, 78 Fed. Reg. 15,410, 15,417 (March 11, 2013); HHS Notice of Benefit and Payment Parameters for 2015, 79 Fed. Reg. 13,744, 13,753 (March 11, 2014); HHS Notice of Benefit and Payment Parameters for 2016, 80 Fed. Reg. 10,750, 10,759 (Feb. 27, 2015); HHS Notice of Benefit and Payment Parameters for 2017, 81 Fed. Reg. 12,204, 12,216 (March 8, 2016). The methodology is an actuarial tool used to predict the relative health of a plan’s enrollees compared to enrollees in other plans in the same risk pool in order to determine charges and payments. See 45 C.F.R. § 153.20. To greatly simplify, the methodology involves four steps: 1. Using demographic and diagnostic data to determine an enrollee’s overall health. 78 Fed. Reg. at 15,417, 15,419. 2. Assigning cost “weights” for each demographic and diagnosis factor. These weights, referred to as “hierarchical condition categories” or “HCCs,” produce a “risk score” for each enrollee that seeks to predict how much more (or less) it will cost to insure that enrollee based on his or her health status. See id. at 15,417, 15,419-15,420. 3. Aggregating the risk scores for each enrollee in each plan to determine an overall plan risk score—a prediction of how much healthier (or sicker) a plan’s enrollees are than average and so how much cheaper (or more expensive) they are to insure in aggregate. Id. at 15,417. 4. Comparing the overall risk scores of each plan within a given risk pool through a “transfer formula” that compares a plan’s estimated premium (the premium the insurer would have to charge to cover the expected health care costs of the particular enrollees in its plan) against a state-wide average premium (the premium an insurer would have to charge to cover the average health care costs of enrollees in the state). Id. at 15430-32. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 20 of 69 9 For plans with lower than average actuarial risk, this methodology yields a risk adjustment charge; for plans with higher than average actuarial risk, it yields a risk adjustment payment. 42 U.S.C. § 18063(a). The program is budget neutral within a risk pool, meaning that charges collected from issuers with relatively “healthier” enrollees are used to fund payments to issuers with relatively “sicker” enrollees in the same risk pool. See 78 Fed. Reg. at 15,441. For the 2015 benefit year, risk adjustment eligible plans were required to submit their risk adjustment data to HHS no later than May 2, 2016. Ex. 1 (Declaration of Jeffrey Grant (“Grant Decl.”)) ¶ 4. On June 30, 2016, HHS released a report announcing final charge and estimated payment amounts for each risk adjustment covered plan for the 2015 benefit year. Id. ¶ 5. HHS began collecting risk adjustment charges in August 2016 and will begin remitting risk adjustment payments in September 2016. Id. ¶¶ 6-7. 3. Temporary Risk Corridors The risk corridors program is a temporary program that seeks to mitigate an issuer’s rate- setting risk during the first three years of the ACA’s reforms. 78 Fed. Reg. at 15,411. Section 1342 of the Act provides that issuers offering individual and small group QHPs between 2014 and 2016 “shall participate in a payment adjustment system based on the ratio of the allowable costs of the plan to the plan’s aggregate premiums.” 42 U.S.C. § 18062(a). Under the “payment methodology” set forth in the Act, if an issuer’s “allowable costs” (essentially, claims costs) exceed a “target amount” (premiums minus administrative costs) by more than three percent, HHS shall pay the issuer a percentage of the difference. 42 U.S.C. § 18062(b)(1). Conversely, if an issuer’s allowable costs are less than the target amount by more than three percent, the plan shall pay HHS a percentage of the difference. 42 U.S.C. § 18062(b)(2). Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 21 of 69 10 In April 2014, HHS announced that it would implement the risk corridors program on budget neutral basis over the three year life of the program. Specifically, HHS explained: [I]f risk corridors collections are insufficient to make risk corridors payments for a year, all risk corridors payments for that year will be reduced pro rata to the extent of any shortfall. Risk corridors collections received for the next year will first be used to pay off the payment reductions issuers experienced in the previous year in a proportional manner up to the point where issuers are reimbursed in full for the previous year, and will then be used to fund current total payments. CMS, Risk Corridors and Budget Neutrality, April 11, 2014, at 1. HHS reiterated and expanded upon this guidance in final rules issued after notice and comment. See Exchange and Insurance Market Standards for 2015 and Beyond, 79 Fed. Reg. 30,240, 30,260 (May 27, 2014); HHS Notice of Benefit and Payment Parameters for 2016, 80 Fed. Reg. 10,750, 10,779 (Feb. 27, 2015). On December 9, 2014, Congress passed the Consolidated and Further Continuing Appropriations Act, 2015 (“the 2015 Spending Law”), which provided that: None of the funds made available by this Act from [CMS trust funds], or transferred from other accounts funded by this Act to the ‘Centers for Medicare and Medicaid Services—Program Management’ account, may be used for payments under section 1342(b)(1) of Public Law 111–148 (relating to risk corridors). Pub. L. No. 113-235, div. G, title II, § 227. The practical effect of this provision was to limit HHS’s budget authority to make risk corridors payments to amounts derived from risk corridors collections authorized under section 1342(b)(2). Stated otherwise, the 2015 Spending Law permits HHS to use risk corridors collections to make risk corridors payments but prohibits it from spending other specified appropriated funds on the program. The Explanatory Statement to the 2015 Spending Law explained that the limitation would ensure that “the risk corridor program will be budget neutral, meaning that the federal government will never pay out more than it collects from issuers over Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 22 of 69 11 the three year period risk corridors are in effect.” Cong. Rec. Vol. 160, No. 151—Book II, H9838 (Dec. 11, 2014).5 On December 18, 2015, Congress enacted an identical funding limitation in the annual appropriations act for fiscal year 2016 (the “2016 Spending Law”). Pub. L. No. 114-113, div. H, title II, § 225. On November 19, 2015, HHS announced that risk corridors charges for the 2014 benefit year fell short of payment requests by $2.5 billion, and therefore, it could only pay 12.6 percent of such requests in the 2015 payment cycle. CMS, Risk Corridors Payments for the 2014 Benefit Year (November 19, 2015) (“November 19 Guidance Document”); see also Defs.’ Opp’n to Mot. for Prelim. Inj., Ex. 1 (Decl. of Christen Linke Young (“Young Decl.”)) ¶ 18. Pursuant to its three-year framework, HHS intends to make further risk corridors payments for the 2014 benefit year in the 2016 payment cycle and, if necessary, the 2017 payment cycle. November 19 Guidance Document; Young Decl. ¶ 18. D. HHS’s Payment and Collection Process HHS operates a monthly payment and collection cycle for ACA-related financial transfers. See 78 Fed. Reg. at 72,370-71. HHS, to “streamline [its] payment and collection process,” promulgated a regulation providing that it may “net” amounts owed by issuers for user fees, consumer subsidy overpayments, and 3Rs obligations against amounts HHS owes to the issuers under the same programs. 78 Fed. Reg. at 72,370-71 (explaining that netting will “permit HHS to calculate amounts owed each month, and pay or collect those amounts from issuers more efficiently”); see also 45 C.F.R. § 156.1215(b) (the “Netting Regulation”). Netting ensures that 5 Available at https://www.congress.gov/crec/2014/12/11/CREC-2014-12-11-bk2.pdf, at pdf page 532. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 23 of 69 12 HHS not only collects from issuers but does so promptly, thereby enabling it to make timely and complete payments to other issuers. Young Decl. ¶ 16. II. CoOportunity Health CoOportunity is a former Iowa CO-OP that operated plans sold on the Federally- facilitated Exchanges in Iowa and Nebraska from January 1, 2014 until February 28, 2015. See First Am. Compl. (“FAC”) ¶¶ 19, 23, 24, 28, 41. During its short existence, CoOportunity received a total of $145.3 million in CO-OP loans from HHS, comprised of $14.7 million in startup funds and $130.6 million in solvency funds. Id. ¶¶ 20, 22, 30, 31. On March 1, 2015, an Iowa state court commenced liquidation of CoOportunity under the Iowa Liquidation Act after finding that the company was financially insolvent and rehabilitation would be futile. Id. ¶ 41. Subsequently, HHS determined that the CoOportunity estate was entitled to receive $71.7 million in reinsurance payments for the 2014 benefit year but owed HHS approximately $11.5 million in risk adjustment charges and consumer subsidy overpayments. FAC ¶¶ 116-117; see also 2014 Reinsurance and Risk Adjustment Summary Report at 19, 29. Consistent with its regular practice, HHS netted the reinsurance, risk adjustment, and consumer subsidy payables and receivables, and remitted to the Liquidators a reinsurance balance of $60.2 million. FAC ¶¶ 116-117; see also 45 C.F.R. 156.1215(b).6 On November 19, 2015, HHS announced that CoOportunity’s risk corridors payment for the 2014 benefit year was $129,955.614.20, of which HHS would pay $16,397,625.99 (a pro- rated amount of 12.6 percent) in the 2015 payment cycle. FAC ¶¶ 96, 99-101; see also CMS, 6 HHS also paid the estate $7.6 million in risk adjustment payments. See 2014 Reinsurance and Risk Adjustment Summary Report at 19. HHS held back 7-10% of the reinsurance and risk adjustment balance owed to CoOportunity, however, because the reinsurance and risk adjustment programs are subject to mandatory sequestration. See 79 Fed. Reg. at 30,257. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 24 of 69 13 Risk Corridors Payment and Charge Amounts for Benefit Year 2014, at Tables 16 & 28.7 Because CoOportunity was both insolvent and indebted to the United States, HHS placed an administrative hold on its accounts, with the result that the pro-rated risk corridors payment was never released to the estate but rather was held in CoOportunity’s account to preserve the agency’s rights to use administrative offset to collect debts owed to the United States. FAC ¶¶ 103, 112, 118-120. HHS continued to net CoOportunity’s payables and receivables throughout the liquidation proceedings, id. ¶¶ 102, 111, 116, 117, and in March 2016, HHS collected the startup loan through offset against CoOportunity’s 3Rs receivables for the 2014 benefit year. Id. ¶¶ 112-114. On March 14, 2016, HHS submitted a Proof of Claim to the Liquidators for the remainder of CoOportunity’s debts to the United States. FAC ¶¶ 67, 113; see also Pls.’ Mot. for Prelim. Inj. Ex. 6 (“Proof of Claim”) [Dkt. No. 33-1]. These debts included $131,520,171.13 under the solvency loan, $8,279.37 in mandatory reinsurance contributions, and unliquidated claims for amounts due under the risk adjustment and consumer subsidy programs. See generally Proof of Claim at Claim Form & Summary 4-8. In addition to these debts, CoOportunity owes the IRS at least $2.65 million in outstanding federal taxes. See Defs.’ Opp’n to Mot. for Prelim. Inj., Ex. 3 (Special Deputy Liquidator’s Third Status Report), at Listing of Assets and Liabilities (ECF p. 9) [Dkt. No. 38-4]. On May 3, 2016, the Liquidators denied the United States’ Proof of Claim in its entirety on the purported basis that the United States “has repeatedly set-off, held, and otherwise engaged in self-help to recoup on its claims, . . . . result[ing] in the United States receiving an improper 7 Available at https://www.cms.gov/CCIIO/Programs-and-Initiatives/Premium- Stabilization-Programs/Downloads/RC-Issuer-level-Report.pdf Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 25 of 69 14 preference over other high-priority claimants[.]” See Ex. 2 (“Notice of Denial of Claim”) ¶¶ 4-7. On July 30, 2016, the United States filed an Objection to the Denial of Claim, which remains pending. Ex. 3 (“Objection to Denial of Claim”). On June 30, 2016, HHS announced that CoOportunity owed $22.6 million in risk adjustment charges and was entitled to receive $2.5 million in reinsurance payments for the 2015 benefit year. 2015 Reinsurance and Risk Adjustment Summary Report, at 25, 37; Decl. of Jeffrey Grant (“Grant Decl.”) ¶ 5. On August 9, 2016, CMS collected $9.4 million of CoOportunity’s risk adjustment charges by netting that amount from funds due to CoOportunity. Grant Decl. ¶ 6. On or around September 9, 2016, HHS will begin its process of distributing this money to other insurance companies in the states of Iowa and Nebraska that enrolled sicker individuals than CoOportunity did and therefore are entitled to receive funds under the risk adjustment program. Grant Decl. ¶ 7. III. This Case On May 3, 2016, the Liquidators filed their Complaint in this Court seeking judicial review of HHS’s offset activities and other issues relating to the liquidation proceedings [Dkt. No. 1]. On July 26, 2016, the Liquidators filed their First Amended Complaint, adding a claim that HHS’s risk adjustment methodology is arbitrary and capricious [Dkt. No. 51]. On August 12, 2016, the Court denied the Liquidators’ Motion for a Preliminary Injunction [Dkt. No. 55]. ARGUMENT I. Legal Standards A. Standard of Review Under Rule 12(b)(1) “The threshold inquiry in every federal case is whether the court has jurisdiction[.]” Rock Island Millwork Co. v. Hedges–Gough Lumber Co., 337 F.2d 24, 26 (8th Cir. 1964). The plaintiff has the burden of establishing federal subject matter jurisdiction, including a waiver of Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 26 of 69 15 sovereign immunity (in cases brought against the United States) and a grant of subject matter jurisdiction. See, e.g., V S Ltd. P’ship v. Dep’t of Hous. & Urban Dev., 235 F.3d 1109, 1112 (8th Cir. 2000). A jurisdictional challenge pursuant to Fed. R. Civ. P. 12(b)(1) may be brought either on the face of the complaint or on the factual truthfulness of its averments. Titus v. Sullivan, 4 F.3d 590, 593 (8th Cir. 1993). In this motion, the United States asserts a factual challenge, and therefore, the Court may consider materials external to the First Amended Complaint, and the Liquidators’ allegations are not entitled to a presumption of truthfulness. Osborn v. United States, 918 F.2d 724, 728-30 (8th Cir. 1990). The court should “weigh the evidence and satisfy itself as to the existence of its power to hear the case.” Id. at 730 (citation omitted). B. Standard of Review Under Rule 12(b)(6) In order to survive a motion to dismiss under Rule 12(b)(6), the “‘complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quotation marks omitted)). A claim is plausible on its face only where “the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citation omitted). The facts alleged “must be enough to raise a right to relief above the speculative level.” Clemons v. Crawford, 585 F.3d 1119, 1124 (8th Cir. 2009) (citation and quotation marks omitted). Although the plausibility standard “is not akin to a ‘probability requirement,’” it demands “more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. II. The Offset Claims Should Be Dismissed for Lack of Jurisdiction and on the Merits In Count I, FAC ¶¶ 145(a), (c), (d) and 151 (b), (c), (f), (g), and (h), and Count II, FAC Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 27 of 69 16 ¶ 153(b), the Liquidators challenge the United States’ past and future offset (including “netting”) of ACA-related payables and receivables and other debts owed to the United States, such as federal taxes. They request a declaration that such offset is unlawful, and they seek to enjoin the United States from exercising future offset and netting altogether or, in the alternative, to limit such offset by, inter alia, requiring HHS to account for CoOportunity’s allegedly outstanding risk corridors payment prior to conducting any further offset. Id. ¶ 145(c), (d); ¶ 151 (b), (c), (f), (g), (h); ¶ 153(a), (b). In addition, they seek to prevent the United States from continuing the administrative hold it placed on CoOportunity’s accounts in order to preserve its rights of offset. Id. ¶¶ 145(e), 151(d), 153(a). These claims collectively will be referred to here as the “Offset Claims.” A. The Court Lacks Jurisdiction over the Offset Claims Because the United States Has Not Waived Its Sovereign Immunity for Monetary Disputes in the District Courts “The United States, as sovereign, is immune from suit save as it consents to be sued.” United States v. Sherwood, 312 U.S. 584, 586 (1941) (citations omitted). Thus, to invoke the jurisdiction of a federal court for relief against a federal agency, a litigant must show that the United States has waived its sovereign immunity. V S Ltd. P’Ship, 235 F.3d at 1112; see also Sherwood, 312 U.S. at 586-87 (“The terms of [the sovereign’s] consent to be sued in any court define that court's jurisdiction to entertain the suit.”). Any such waiver “must be unequivocally expressed in the statutory text” and “strictly construed, in terms of its scope,” in favor of the United States. Lane v. Pena, 518 U.S. 187, 192 (1996). 1. The APA Does Not Waive Sovereign Immunity for Monetary Disputes The Liquidators rely on the APA as the waiver of immunity for their claims. To invoke the APA as a waiver of sovereign immunity, a plaintiff must satisfy both 5 U.S.C. § 702, which Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 28 of 69 17 requires that the plaintiff seek “relief other than money damages,” and 5 U.S.C. § 704, which requires that no “adequate remedy” for the plaintiff’s alleged injury is available in another court. See, e.g., Consol. Edison Co. of New York v. U.S. Dep’t of Energy, 247 F.3d 1378, 1383 (Fed. Cir. 2001); Cathedral Square Partners Ltd. P’ship v. S. Dakota Hous. Dev. Auth., 679 F. Supp. 2d 1034, 1040 (D.S.D. 2009) (“In order to establish a waiver of sovereign immunity under the APA, a plaintiff must prove . . . that it is seeking relief other than money damages, 5 U.S.C. § 702 . . . [and] that there is no adequate remedy available elsewhere, 5 U.S.C. § 704.”). As courts have long held, the availability of an action for money damages in the United States Court of Federal Claims “is presumptively an ‘adequate remedy’ for § 704 purposes” that forecloses relief under the APA. Telecare Corp. v. Leavitt, 409 F.3d 1345, 1349 (Fed. Cir. 2005) (citations omitted). “[E]ven though a plaintiff may often prefer a judicial order enjoining a harmful act or omission before it occurs, damages after the fact are considered an adequate remedy in all but the most extraordinary cases.” Suburban Mortgage Assocs., Inc. v. U.S. Dep’t of Hous. & Urban Dev., 480 F.3d 1116, 1127 n.14 (Fed. Cir. 2007) (citation and quotation marks omitted). And, although “the Court of Federal Claims does not have the power to grant future payments . . . any such prospective relief will be satisfied by the res judicata effect of a money judgment.” Cathedral Square Partners Ltd. P’ship, 679 F. Supp. 2d at 1044 (citations omitted). Thus, in evaluating whether the requirements of sections 702 and 704 have been met, courts uniformly have held that a litigant “may not circumvent the . . . exclusive jurisdiction [of the United States Court of Federal Claims] by framing a complaint in the district court as one seeking injunctive, declaratory or mandatory relief where the thrust of the suit is to obtain money from the United States.” Christopher Village, L.P. v. United States, 360 F.3d 1319, 1328 (Fed. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 29 of 69 18 Cir. 2004) (emphasis added; citing cases).8 2. The Offset Claims Seek Monetary Relief Solely Within the Jurisdiction of the Court of Federal Claims Notwithstanding the Liquidators’ effort to frame their offset claims in equitable terms, “offset of other debt is a form of monetary relief.” Gonzales & Gonzales Bonds & Ins. Agency, Inc. v. Dep’t of Homeland Sec., 490 F.3d 940, 945 (Fed. Cir. 2007) (citation omitted); see also Beloit Corp. v. C3 Datatec, Inc., 78 F.3d 586, at *1 (7th Cir. 1996) (“Usually payment occurs by check or cash, but payment may occur by cancellation of offsetting accounts.”). Therefore, “a plaintiff seeking the return of money it already paid the government” through offset belongs in the Court of Federal Claims. Gonzales & Gonzales Bonds & Ins. Agency, 490 F.3d at 945; see also Dalton v. Sherwood Van Lines, Inc., 50 F.3d 1014, 1017 (Fed. Cir. 1995) (“A dissatisfied [participant in an administrative scheme] may . . . file suit under the Tucker Act . . . to obtain judicial review of the setoff decision[.]”). Numerous courts have held as much. In McBride Cotton & Cattle Corp. v. Veneman, 116 F. App’x 89 (9th Cir. 2004), for example, the Court of Appeals for the Ninth Circuit held that APA jurisdiction was not available for “claims that payments due . . . under various agricultural program contracts were wrongfully reduced through unauthorized administrative offsets, that the unauthorized practice must cease, and that [plaintiffs] ha[d] the right to receive refunds.” Id. at 90-91. The court reasoned that, although the “claims are not expressed as claims for money damages, . . . adequate relief exists in the Court of Federal Claims,” and “[i]n the event of success, [plaintiff] could receive a refund of all unauthorized offsets and the Secretary 8 The Federal Circuit has exclusive jurisdiction over appeals of motions to transfer actions to the Court of Federal Claims and therefore has considered these issues as they have arisen nationwide. See 28 U.S.C. § 1292(d)(4)(A). Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 30 of 69 19 would be prohibited from offsetting further payments under the principle of res judicata.” Id. at 91. Similarly, in O’Connell v. Mills, No. 13-15124, 2014 WL 354696 (E.D. Mich. Jan. 31, 2014), the court found that APA jurisdiction was lacking over a challenge to an agency’s use of administrative offset because “the principal relief at issue appears to be wholly monetary in nature, and it is doubtful whether the injunctive or prospective relief sought by Plaintiff is truly necessary.” Id. at *4; see also Mohawk Airlines, Inc. v. Civil Aeronautics Bd., 329 F.2d 894, 897 (D.C. Cir. 1964) (holding that “there was clearly an adequate remedy in the Court of Claims . . . because, if the . . . [offset] of the alleged overpayments were improper, [plaintiff] was entitled to the disputed sum . . . and could have maintained an action in the Court of Claims to recover the money as having been wrongfully withheld.”); Briggs v. United States, 564 F. Supp. 2d 1087, 1093 (N.D. Cal. 2008) (holding that “a single, uncomplicated payment of money would provide [the plaintiff] with an entirely adequate remedy,” because “once Plaintiff . . . was paid” the amounts previously withheld, “it would be unlikely (and inappropriate) for defendants to continue with . . . offsets” held to be unlawful) (quotation marks and citation omitted). Thus, regardless of whether the Liquidators’ offset claim is framed as an attack on past offsets or an effort to enjoin future offsets, the Court of Federal Claims can supply an adequate remedy through an award of monetary damages. The availability of such relief forecloses jurisdiction under the APA. Arguing otherwise, the Liquidators have relied on Bowen v. Massachusetts, 487 U.S. 879 (1988). See, e.g., Pls.’ Br. in Support of Mot. for Prelim. Inj., at 12-14 [Dkt. No. 17-1]. In Bowen, the Supreme Court held that litigation in the Court of Federal Claims would not provide adequate relief where the plaintiff states maintained ongoing regulatory relationships with the Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 31 of 69 20 federal government and sought guidance related to the prospective management of programmatic issues “that occur over time and that involve constantly shifting balance sheets[.]” Bowen, 487 U.S. at 904 n.39. The Liquidators, however, are situated entirely differently than the plaintiffs in Bowen. Unlike the complex relationships between the parties in that case—which featured continuous programmatic administration between sovereign governments in the context of changing demographics, advancing medical technologies, unforeseeable health threats, and varying state and federal economic conditions— the Liquidators represent a defunct health insurer, and their only relationship with the United States is to oversee a finite number of payments and collections based on business predating March 2015. Thus, unlike in Bowen, a “naked money judgment” combined with the res judicata effects of that judgment would provide complete and adequate relief. See Brazos Elec. Power Co-op., Inc. v. United States, 144 F.3d 784, 787-88 (Fed. Cir. 1998) (rejecting a plaintiff’s invocation of Bowen because “in the instant case, a single, uncomplicated payment of money would provide [plaintiff] with an entirely adequate remedy. No prospective relief would be required and there would be no ongoing relationship to monitor and referee.”). The Liquidators fail to establish that the APA confers jurisdiction on the Court to award the relief they seek.9 9 The Liquidators also have suggested that the Court has jurisdiction under the All Writs Act. FAC ¶ 8. The All Writs Act merely confirms a court’s authority to issue writs “in aid of” its jurisdiction. 28 U.S.C. § 1651(a). “The All Writs Act cannot enlarge a court’s jurisdiction,” nor is it justifiable where alternative remedies are available to a claimant. Clinton v. Goldsmith, 526 U.S. 529, 534-38 (1999) (citations omitted). Nor does the Loan Agreement supply a source of jurisdiction, as Plaintiffs allege, FAC ¶ 12. It is well-established that a “[l]ack of jurisdiction of a federal trial court touching the subject matter of litigation cannot be waived by the parties[.]” Jader v. Principal Mut. Life Ins. Co., 925 F.2d 1075, 1077 (8th Cir. 1991) (citation omitted). Similarly, “[o]nly Congress can waive sovereign immunity.” Jewish Ctr. for Aged v. U.S. Dep’t of Hous. & Urban Dev., No. 406-CV-1739 JCH, 2007 WL 763928, at *2 (E.D. Mo. Mar. 9, 2007) (citing United States v. Mitchell, 463 U.S. 206, 215-16 (1983)). Thus, the parties could not contractually agree to a waiver of sovereign immunity that is broader than the waiver supplied by the APA. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 32 of 69 21 B. The Court Lacks Jurisdiction to Issue Declaratory or Injunctive Relief Regarding the United States’ Use of Setoff to Collect Taxes To the extent the Offset Claims touch on the collection of CoOportunity’s tax debts, jurisdiction is lacking for the additional reason that the Anti-Injunction Act (“AIA”), 26 U.S.C. § 7421(a), and the Declaratory Judgment Act, 28 U.S.C. § 2201, prohibit the declaratory and injunctive relief sought. The AIA states that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person[.]” 26 U.S.C. § 7421(a). See also Nat’l Federation of Independent Businesses v. Sebelius, __ U.S. __, 132 S. Ct. 2566, 2583 (2012) (explaining that the AIA “protects the Government’s ability to collect a consistent stream of revenue, by barring litigation to enjoin or otherwise obstruct the collection of taxes” and that because of the AIA, “taxes can ordinarily be challenged only after they are paid, by suing for a refund.”).10 Setoff is one of the means by which the United States may collect tax debts. See, e.g., Munsey Trust Co., 332 U.S. at 239 ( “The government has the same right which belongs to every creditor, to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him.”); In re Nuclear Imaging Systems, Inc., 260 B.R. 724, 733 (Bankr. E.D. Pa. 2000) (denying creditor’s motion to prohibit the IRS from collecting tax claim through setoff against debts owed to debtor by HHS). Consequently, under the AIA, the Court lacks jurisdiction to enjoin the United States from using setoff to collect CoOportunity’s tax debts. 10 There are statutory and judicial exceptions to the AIA, but none of them apply here. The judicial exception requires a movant to demonstrate that, without the injunction, it will suffer irreparable harm and that “it is clear that under no circumstances could the Government ultimately prevail” on its claim. Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 7 (1962). Here, the Liquidators cannot show irreparable harm because monetary damages are an adequate remedy. Furthermore, they have admitted that CoOportunity has over $2.65 million in tax liability, thus foreclosing their ability to show that “under no circumstances” can the government prevail in establishing its claim. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 33 of 69 22 The Court also lacks jurisdiction to issue declaratory relief regarding the use of setoff to collect taxes owed by the estate. Courts have construed the Declaratory Judgment Act as generally divesting the federal courts of jurisdiction to issue declaratory judgments regarding federal taxes, a doctrine known as the tax exception to the Declaratory Judgment Act. See, e.g., Sec. & Exch. Comm’n v. Credit Bancorp, Ltd., 297 F.3d 127, 130, 137-38 (2d Cir. 2002), Singleton v. Mathis, 284 F.2d 616, 619 (8th Cir. 1960) (“[T]he Declaratory Judgment Act [ ] specifically excepts controversies over federal taxes from the scope of the Act.”) (citations omitted). 11 The purpose of this exception is to prevent courts from interfering with the assessment and collection of taxes. See Bob Jones Univ. v. Simon, 416 U.S. 725, 732 n.7 (1974) (noting that the Declaratory Judgment Act, like the Anti-Injunction Act, reflects “congressional antipathy for premature interference with the assessment or collection of any federal tax . . . .”); see also Ishler v. Comm’r, 442 F. Supp. 2d 1189, 1209-1210 (N.D. Ala. 2006). Thus, the Court lacks jurisdiction to issue declaratory relief regarding the United States’ right to use offset to collect taxes. C. The Offset Claims Should Be Dismissed on the Merits For the reasons stated above, the Court should dismiss Plaintiffs’ Offset Claims without reaching the merits. But if the Court reaches the merits, the claims fail as a matter of law. 11 The Declaratory Judgment Act provides, in pertinent part: In a case of actual controversy within its jurisdiction, except with respect to Federal taxes . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. 28 U.S.C. § 2201(a) (emphasis added). There are exceptions to the tax exception but they do not apply here. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 34 of 69 23 1. Federal and State Law Recognize HHS’s Offset and Netting Rights The right to use offset to collect a mutual debt owed by an insolvent debtor is firmly established under the law. Federal courts have consistently recognized that the offset mechanism “allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding ‘the absurdity of making A pay B when B owes A.’” Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 18 (1995) (quoting Studley v. Boylston Nat. Bank, 229 U.S. 523, 528 (1913)); see also Munsey Trust Co. of Washington, D.C., 332 U.S. at 239; United States v. DeQueen & E. R.R. Co., 271 F.2d 597, 599 (8th Cir. 1959) (acknowledging the government’s right of “setoff, without limitation”); United States v. Tafoya, 803 F.2d 140, 141 (5th Cir. 1986) (“The right of setoff is ‘inherent in the United States Government,’ . . . and exists independent of any statutory grant of authority to the executive branch.”) (citations omitted). Consistent with this longstanding recognition, HHS regulations authorize the use of offset to collect funds owed to the United States. In particular, 42 C.F.R. § 401.607(a)(2) provides that HHS “recovers amounts of claims due from debtors . . . by . . . [o]ffsets against monies owed to the debtor by the Federal government where possible.” And the Netting Regulation specifically permits HHS to utilize netting—a form of offset—to collect amounts owed under the 3Rs and other ACA programs. 45 C.F.R. § 156.1215(b). Iowa law also allows—and in fact requires—offset of mutual debts. The Iowa Liquidation Act states that “mutual debts or mutual credits between the insurer and another person in connection with an action or proceeding under this chapter shall be set off and the balance only shall be allowed or paid.” Iowa Code § 507C.30(1) (emphasis added); see also In re Liquidation of Home Ins. Co., 953 A.2d 443, 453 (N.H. 2008) (holding that discretionary disallowance of otherwise qualifying setoffs was not permitted under liquidation statute because Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 35 of 69 24 “the word ‘shall’ is ‘unambiguous. It is mandatory, not permissive, language.’”) (citations omitted); Berger v. Cas’ Feed Store, Inc., 543 N.W.2d 597, 599 (Iowa 1996) (“general right of setoff is well established”). The Liquidators simply ignore this robust body of authority, contending that HHS may not exercise offset or netting because “state insurance law places policyholder level claims above claims of HHS[.]” FAC ¶ 115(c); see also id. ¶115(e). But courts have repeatedly rejected the assertion that the right of setoff is limited by a state priority scheme. See, e.g., In re Liquidation of Realex Grp. N.V., 210 A.D.2d 91, 94 (N.Y. App. Div. 1994) (“Although permitting offsets may conflict with the statutory purpose of providing for the pro rata distribution of the insolvent’s estate to creditors, the Legislature has resolved the competing concerns and recognized offsets as a species of lawful preference. Indeed, . . . it is ‘only the balance, if any, after the set-off is deducted which can justly be held to form part of the assets of the insolvent’” (emphasis added; quoting Scott v. Armstrong, 146 U.S. 499, 510 (1892))); Prudential Reinsurance Co. v. Superior Court, 3 Cal. 4th 1118, 1124-25 (1992) (adopting position of “the majority of state and federal courts addressing the statutory right of setoff” and holding that setoff provision “may not reasonably be construed as conditioning [a creditor’s] right to set off on the insolvent insurer’s ability to pay in full the claims of those in higher priority classes”); see also In re Liquidation of Home Ins. Co., 972 A.2d 1019, 1022-23 (N.H. 2009) (noting that “setoff is an exception to the [priority framework] for discharging claims against an insolvent debtor”); In re Agriprocessors, Inc., 547 B.R. 292, 325 (N.D. Iowa 2016) (“Setoffs are not ‘transfers’ . . . and, therefore, are not avoidable as preferences.”). Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 36 of 69 25 The Liquidators also suggest—relying on provisions of the Loan Agreement relating to security and repayment after default, see FAC ¶¶ 84(c), 115(b)—that HHS waived its right to offset the loan debt as a matter of contract. Not so. The Loan Agreement provides: Right of Set-Off Notwithstanding any other provisions of this Agreement to the contrary, in the event any Event of Default is not cured . . . within applicable notice and cure periods, Lender shall have at its disposal the full range of available rights, remedies and techniques to collect delinquent debts . . . including . . . administrative offset . . . .” Loan Agreement § 19.12 (emphasis added).12 Thus, the right of offset recognized by federal and state law is expressly preserved and reinforced by the Loan Agreement. In the absence of any specific legal authority against setoff, the Liquidators rely heavily on the state court’s Liquidation Order, which purports to prohibit the government from exercising setoff “without further order of this Court.” FAC ¶ 43. The Liquidation Order, however, does not bind the United States because Congress has not waived sovereign immunity for state court insurance proceedings. See Cal. Ins. Gty. Ass’n v. Burwell, No. 15-cv-1113, 2016 WL 1050190, at *4-5 (C.D. Cal. Mar. 16, 2016) (holding that the United States has not waived sovereign immunity so as to be subject to the bar date of the state insurance insolvency statute); see also TransAmerica Assurance Corp. v. Settlement Capital Corp., 489 F.3d 256, 260-63 (6th Cir. 2007) (state court order purporting to affect the rights of the United States was void as to the United States, having been entered without a waiver of sovereign immunity); Twin City Fire Insurance Co. v. Adkins, 400 F.3d 293, 299 (6th Cir. 2005) (“Where a federal court finds that a state-court decision was rendered in the absence of subject matter jurisdiction . . . it may declare 12 This provision does not apply to the solvency note, which was specifically amended to subordinate the repayment obligation and eliminate the right of offset. See Proof of Claim at Proof of Claim Summary ¶ 4. No such amendment was executed for the start-up note. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 37 of 69 26 the state court’s judgment void ab initio and refuse to give the decision effect in the federal proceeding.”) (citations omitted); Settlement Funding, LLC v. Garcia, 533 F. Supp. 2d 685, 690 (W.D. Tex. 2006) (state court order “not binding or enforceable against the United States” absent a waiver of sovereign immunity) (citation omitted). In seeking a preliminary injunction, the Liquidators also argued that the United States’ submission of a Proof of Claim in the liquidation proceeding established a waiver of sovereign immunity. But the Proof of Claim expressly disclaims any waiver of jurisdiction, Proof of Claim Summary at 9, and in any event, “[o]nly Congress can waive sovereign immunity[.]” Jewish Ctr. for Aged, 2007 WL 763928, at *2 (citation omitted). “No officer by his action can confer jurisdiction[.]” United States v. Shaw, 309 U.S. 495, 501 (1940); see also United States v. U. S. Fid. & Guar. Co., 309 U.S. 506, 513 (1940) (“immunity cannot be waived by officials”) (citations omitted).13 Thus, although the Iowa court has in rem jurisdiction over CoOportunity’s assets, which allows it to administer claims and determine distributions, that jurisdiction does not empower the Iowa court to enjoin or compel any action by the United States in the absence of a specific statutory waiver of sovereign immunity. United States v. Nordic Vill. Inc., 503 U.S. 30, 38 (1992).14 13 Even if the Proof of Claim could waive the United States’ sovereign immunity, it was not filed until March 2016, more than a year after the Liquidation Order was issued. See FAC ¶¶ 41, 113. Therefore, even under the Liquidators’ theory, the Liquidation Order could not have precluded the offset of the $14.7 million startup debt or the netting of $11.5 million in programmatic debts, both of which predated the filing of the Proof of Claim. See FAC ¶¶ 111- 117. 14 Sovereign immunity protects the United States from any compulsive state action, not simply suits in which the United States is a named defendant. See United States v. Rural Elec. Convenience Co-op. Co., 922 F.2d 429, 433 (7th Cir. 1991) (“The general rule is that a suit is against the sovereign if the judgment would expend itself on the public treasury or domain, or interfere with public administration, . . . or if the effect of the judgment would be to restrain the Government from acting or compel it to act.”) (citations and quotation marks omitted); Scheckel Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 38 of 69 27 Because Congress has not waived the United Sates’ sovereign immunity for liquidation proceedings in state court, the United States was not required to request permission from the Iowa court before exercising its setoff rights, as the Liquidators suggest, FAC ¶¶ 109-111. See TransAmerica Assur. Corp., 489 F.3d at 262 (“compulsion itself is the vice that implicates federal sovereign immunity.”). The Liquidation Order cannot render the United States’ lawful exercise of setoff unlawful. 2. Risk Corridors Obligations Do Not Affect the United States’ Right of Offset The Liquidators also contend that even if the United States is entitled to exercise setoff and netting, it cannot do so until it pays the $130 million allegedly owed to CoOportunity for 2014 benefit year risk corridors payments. FAC ¶¶ 151(f), (h)(ii). That is incorrect because, pursuant to HHS’s administrative framework, only 12.6 percent of this amount was payable in the 2015 payment cycle.15 HHS has stated that additional payments will be made in the 2016 payment cycle and, if necessary, in the 2017 payment cycle, but those amounts are not presently due and HHS has no funds to pay them. See November 19 Guidance Document; Young Decl. ¶ 18. HHS can continue to net current debts and receivables as they present themselves. In any event, HHS cannot conduct netting in a manner that violates appropriations restrictions. An agency may not “authorize an expenditure . . . exceeding an amount available in an appropriation or fund for the expenditure.” 31 U.S.C. § 1341(a)(1). If augmenting an agency appropriation directly would be impermissible under appropriations laws, then doing so by setoff v. I.R.S., No. C03-2045 LRR, 2004 WL 1771063, at *2 (N.D. Iowa June 18, 2004) (“an injunction to prevent the IRS from collecting federal taxes” implicated sovereign immunity even though United States not named as defendant). 15 Even the 12.6 percent is dependent upon HHS’s ability to collect in full from issuers that owe charges under the program. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 39 of 69 28 is equally improper. See 2 General Accounting Office, Principles of Federal Appropriations Law, at 6-205 (3d ed. 2006).16 In the 2015 and 2016 Spending Laws, Congress specifically restricted HHS’s ability to make risk corridors payments in excess of collections, which—for the 2014 benefit year—meant that HHS was restricted to paying 12.6 percent of risk corridors claims in the 2015 payment cycle. HHS may not use netting in a way that circumvents that restriction, and the Court may not order it to do so under the APA. See, e.g., Cty. of Suffolk v. Sebelius, 605 F.3d 135, 138 (2d Cir. 2010) (“Where, as here, the congressional appropriations relating to the funds sought by private litigants have been lawfully distributed—and therefore exhausted—by a federal agency, courts lack authority to grant effectual relief” under the APA); City of Houston v. Dep’t of Hous. & Urban Dev., 24 F.3d 1421, 1426 (D.C. Cir. 1994) (“[I]t is beyond dispute that a federal court cannot order the obligation of funds for which there is no appropriation”) (citation omitted). In sum, even if Plaintiffs’ allegedly remaining 2014 risk corridors payments were presently due (they are not), the omission of such amounts from the netting calculation would not be “arbitrary and capricious”; it would be the proper course to maintain consistency with appropriations laws. 3. The Liquidators’ Remaining Arguments Against Offset Are Meritless Last, the Liquidators argue that offset is impermissible because the debts are not mutual and because the Start-up loan was, “in effect, [a] capital contribution[] rather than [a] loan[].” FAC ¶ 115(h), 151(g)(i). The Liquidators are simply wrong to suggest there is no mutuality. FAC ¶ 151(g). Mutuality exists when the debts are “in the same right and between the same parties standing in 16 Available at http://www.gao.gov/assets/210/202819.pdf Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 40 of 69 29 the same capacity[.]” Meyer Med. Physicians Grp., Ltd. v. Health Care Serv. Corp., 385 F.3d 1039, 1041 (7th Cir. 2004) (citations omitted). “Capacity, for these purposes, means legal capacity (e.g., principal, agent, trustee, beneficiary).” In re Liquidation of Home Ins. Co., 953 A.2d at 447-48 (citation and quotation marks omitted); Matter of Midland Ins. Co., 590 N.E.2d 1186, 1192 (1992) (same). Thus, mutuality is lacking, for example, where one debt is owed in an individual debtor-creditor capacity while another is owed in a fiduciary capacity. See, e.g., Wiand v. Meeker, 572 F. App’x 689, 691 (11th Cir. 2014); In re Brittenum & Assocs., Inc., 868 F.2d 272, 275-76 (8th Cir. 1989). But where both debts are owed in the same capacity, the debts are mutual. See, e.g., In re Agriprocessors, Inc., 547 B.R. at 325.17 As sovereign, the federal government’s duties “are not defined by . . . common-law conception[s]” such as those defining the fiduciary capacities of private parties; rather, fiduciary duties only arise in the federal government “if it is plain from the relevant statutes or regulations that the government has accepted such a responsibility.” Grady v. United States, No. 13-15C, 2013 WL 4957344, at *3 (Ct. Fed. Cl. July 31, 2013) (citation omitted), aff’d, 565 F. App’x 870 (Fed. Cir.), cert. denied, 135 S. Ct. 245 (2014); see also Ashley v. U.S. Dep’t of Interior, 408 F.3d 997, 1002 (8th Cir. 2005). Under the ACA, HHS administers the 3Rs programs, by, inter alia, collecting funds from certain issuers and making payments to others. See 42 U.S.C. §§ 18061(b), 18062(a), 18063(a). But the ACA neither makes “plain” nor even suggests that the government has accepted a fiduciary responsibility with respect to 3Rs payments. Furthermore, the Congressional Budget Office treats all such collections and payments as revenues and outlays. See Updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act, at 9, Congressional Budget Office (April 2014) (“CBO treats the [3Rs] 17 There are other requirements for mutuality, but they are not at issue here. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 41 of 69 30 payments as outlays and the collections as revenues . . . .”).18 These circumstances remove any doubt that the 3Rs debts share mutuality with all other debts owed between the United States and the CoOportunity estate.19 Finally, the start-up loan is not a “capital contribution,” FAC ¶ 115(h); it is debt. The ACA is clear: start-up loans are “loans.” 42 U.S.C. § 18042(b)(1)(A). The start-up loan also bears all of the traditional indicia of debt: it has a fixed maturity date and repayment schedules, id. § 18042(b)(3); it bears interest, 45 C.F.R. § 156.520(c)(1); and the estate’s failure to pay the loan entitles HHS to use “any and all remedies available . . . to collect the debt.” 45 C.F.R. § 156.520(d). Consistent with these characteristics, unlike the solvency loans, startup loans are listed on a CO-OP’s statutory balance sheet as debt. Cf. 45 C.F.R. § 156.520(a)(2). There is no merit to the Liquidators’ suggestion that such loans are capital contributions.20 In sum, all of the applicable authority overwhelmingly supports the United States’ exercise of netting and offset. And because HHS has a right to use offset and netting to collect debts owed by CoOportunity, it also was permitted to place a hold on CoOportunity’s account in order to preserve that right. Strumpf, 516 U.S. at 21. The Offset Claims should be dismissed in their entirety. 18 Available at https://www.cbo.gov/sites/default/files/113th-congress-2013- 2014/reports/45231-ACA_Estimates_OneColumn.pdf 19 For purposes of mutuality, all agencies of the United States are treated as a single unit. See, e.g., Cherry Cotton Mills v. United States, 327 U.S. 536, 539 (1946); In re Turner, 84 F.3d 1294, 1296 (10th Cir. 1996) (“[T]he United States is treated as a unitary creditor, and agencies of the United States government . . . may set off debts owed by one agency against claims that another agency has against a single debtor.”). Therefore, all of CoOportunity’s debts to the United States—whether owed to HHS or the IRS—are mutual. 20 Moreover, the Liquidators have identified no authority for the Court, under the APA, to recharacterize the start-up loan. Cf. In re SubMicron Sys. Corp., 432 F.3d 448, 454–55 (3d Cir. 2006) (noting that a bankruptcy court’s authority to recharacterize debt is based on provisions of the Bankruptcy Code). Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 42 of 69 31 III. The Risk Adjustment Claim Should Be Dismissed for Lack of Jurisdiction In Count I, FAC ¶ 145(f) and ¶ 151(e), the Liquidators seek a declaration that HHS’s “Risk Adjustment methodology, charges, and any attempt to collect those charges are arbitrary, capricious, and an abuse of discretion,” and in Count II, FAC ¶ 153(c), they seek an order enjoining HHS “from any attempt to collect Risk Adjustment charges” (collectively, the “Risk Adjustment Claim”). The Risk Adjustment Claim should be dismissed because the Liquidators cannot meet their burden to show that they would gain any relief even if they were to prevail on the merits. In order to establish standing to invoke the jurisdiction of a federal court, the plaintiff must identify an injury-in-fact that is “likely to be redressed by a favorable judicial decision.” Owner-Operator Indep. Drivers Ass’n, Inc. v. United States Dep’t of Transp., No. 15-2090, 2016 WL 4087235, at *3 (8th Cir. Aug. 2, 2016) (emphasis added, citation and quotation marks omitted). Here, the Liquidators have identified an injury: assessment of approximately $22 million in risk adjustment charges for the 2015 benefit year. FAC ¶ 126. But, as explained below, because of the limited remedies available under the APA, they cannot show that such harm is “likely to be redressed” by a decision in their favor. CoOportunity participated in the risk adjustment program in both 2014 and 2015, but the Liquidators only challenge the methodology for the 2015 benefit year. FAC ¶¶ 123-142. HHS has already, in large part, administered the risk adjustment program for 2015. Issuers submitted their data by May 2, 2016. Grant Decl. ¶ 4. On June 30, HHS announced payment and charge amounts, id. ¶ 5, and in August, HHS began collecting these amounts through netting. Id. ¶ 6. Pursuant to this process, HHS already collected, through netting, $9.4 million of CoOportunity’s Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 43 of 69 32 risk adjustment charges. Id. The only possible forum in which the Liquidators can obtain a refund of this already-collected money is the Court of Federal Claims. As to the approximately $13 million in charges that have been assessed but, due to CoOportunity’s insolvency, not yet collected, HHS will (so long as it is able) continue to apply its Netting Regulation to collect these charges from CoOportunity as funds become available from payments under other programs. Grant Decl. ¶ 10. By the time the case is resolved, it is possible that the entire balance will have been collected and distributed to other health insurance companies. This would, of course, leave the Liquidators without any possible remedy in this Court. The risk adjustment claim should be dismissed to the extent the Liquidators cannot meet their burden to show redressability in this Court. IV. The Choice of Law Claim Should Be Dismissed for Lack of Jurisdiction and on the Merits In Count I, Plaintiffs request declaratory judgment “[t]hat Iowa law applies and controls the priority of all claims against the CoOportunity Estate, including the federal government’s claims as asserted by Defendants” (the “Choice of Law Claim”). FAC ¶ 151(a). A. The Choice of Law Claim Improperly Seeks an Advisory Opinion The federal courts established pursuant to Article III of the Constitution do not render advisory opinions; rather, “concrete legal issues, presented in actual cases, not abstractions are requisite. This is as true of declaratory judgments as any other field.” Golden v. Zwickler, 394 U.S. 103, 108 (1969) (citations and quotation marks omitted). A central reason for avoiding cases that are “not yet sufficiently focused is the unwillingness to render a decision whose ramifications in other fact situations are unclear.” Cass Cty. v. United States, 570 F.2d 737, 740– 41 (8th Cir. 1978) (citations omitted). To present an appropriate vehicle for declaratory judgment, a “disagreement must not be nebulous or contingent but must have taken on fixed and Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 44 of 69 33 final shape so that a court can see what legal issues it is deciding, what effect its decision will have on the adversaries, and some useful purpose to be achieved in deciding them.” Id. at 741 (citation omitted). The facts alleged must “show that there is a substantial controversy . . . of sufficient immediacy [in] reality to warrant the issuance of a declaratory judgment.” Golden, 394 U.S. at 108 (citations and quotation marks omitted). The central dispute presented by this case—and the only dispute presently at issue in the liquidation proceeding—is whether the United States’ exercise of offset is legally permissible. This issue does not require a determination of which law applies to the United States because, as discussed above, state law and federal law both recognize offset as an inherent right, and the state court order purporting to limit that right is not binding on the United States. See supra at 23-27. In the absence of a justiciable dispute regarding applicable law as it relates to offset, the Liquidators attempt to manufacture one relating to priority. But no such controversy presently exists. The Liquidators allege that the United States has “claim[ed] that the federal government has ‘super priority’ over all other claims and creditors,” FAC ¶ 70, but an examination of the United States’ Proof of Claim reveals that the United States has made no such claim. See generally Proof of Claim. To the contrary, the Proof of Claim Summary expressly acknowledged that the estate’s “obligation to make interest and principal payments on the Solvency Loan is ‘subject and subordinate to the claims of all policyholders and . . . all other obligations of” CoOportunity. Id. at Proof of Claim Summary ¶ 4 (emphasis added). And, although the cover attachment to the Proof of Claim generally states that the government’s other claims “may be entitled to first priority treatment pursuant to 31 U.S.C. § 3713,” id. at Attachment to Proof of Claim, nowhere in the more detailed Proof of Claim Summary did the Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 45 of 69 34 United States assert “super-priority” (or any other priority) as to any claim. Furthermore, the Liquidators denied the government’s Proof of Claim in its entirety, to which the United States has filed an objection, and in these submissions neither side has discussed—much less disputed—the priority of the United States’ claims in the event they are ultimately allowed. See generally Exs. 2 & 3. There simply is no live dispute regarding priority at this juncture.21 B. The Choice of Law Claim Should Be Dismissed on the Merits Even if there were a live dispute regarding the application of state law, the Liquidators’ request for an expansive declaration “[t]hat Iowa law applies and controls the priority of all claims against the CoOportunity Estate,” is so broad that it necessarily fails. FAC ¶ 151(a) (emphasis added). The Liquidators devote a substantial portion of their FAC to establishing that CO-OPs such as CoOportunity are required to comply with state insurance laws, including state insolvency schemes, and that Congress, in enacting the ACA, generally did not intend to alter the tradition of state regulation of insurance. See FAC ¶¶ 55-67. Plaintiffs seek to take that limited and non-controversial proposition and stretch it into a conclusion that state law and the state court govern the United States in the exercise of its sovereign functions. That is not the law. The Supreme Court “has consistently held that federal law governs questions involving the rights of the United States arising under nationwide federal programs.” United States v. Kimbell Foods, Inc., 440 U.S. 715, 726 (1979) (citation omitted); see also Boyle v. United Tech. Corp., 487 U.S. 500, 504-05 (1988). Consistent with Kimbell Foods, the Eighth Circuit and 21 Even if the Court were to conclude that Plaintiffs have alleged a sufficiently concrete controversy to satisfy Article III, it nevertheless retains the discretion to decline to issue declaratory relief. Cass Cty., 570 F.2d at 741. It would be particularly appropriate to exercise that discretion here given the breadth of the declaration sought by the Liquidators. Cass Cty., 570 F.2d at 742 (affirming district court’s denial of declaratory relief where “[t]he broad blueprint sought by appellants based on less than specific issues would be entirely inappropriate . . . . The District Court properly rejected the invitation to produce a law review article.”). Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 46 of 69 35 other circuits generally have applied federal law where the United States’ interests under federal insurance programs are at stake because such programs “create[] substantial financial exposure for the federal government and U.S. taxpayers.” McCarty v. S. Farm Bureau Cas. Ins. Co., 758 F.3d 969, 972 (8th Cir. 2014) (citing Kimbell Foods, 440 U.S. at 728); see also United States v. Rhode Island Ins. Insolvency Fund, 80 F.3d 616, 619-23 (1st Cir. 1996) (holding that the federal Medicare Secondary-Payer Act, rather than state law, governed the United States’ rights in insurance insolvency); Geston v. Anderson, 729 F.3d 1077, 1079 (8th Cir. 2013) (affirming district court holding that federal Medicaid Act preempted state insurance law regarding treatment of annuity payments); Gunter v. Farmers Ins. Co., 736 F.3d 768, 772 (8th Cir. 2013) (holding that National Flood Insurance Act and related regulations preempted state insurance law). Consistent with this jurisprudence, Congress made clear that the ACA preempts any state law that “‘hinder[s] or impede[s]’ the implementation of the ACA[.]” St. Louis Effort for AIDS v. Huff, 782 F.3d 1016, 1022 (8th Cir. 2015) (citing 42 U.S.C. § 18041(d)). And, consistent with the ACA’s preemption provision, the Loan Agreement between HHS and CoOportunity provided that the Agreement would “be governed by the laws and common law of the United States, including without limitation such regulations as may be promulgated from time to time by HHS . . . and by the laws of the States of Iowa and Nebraska to the extent the same do not conflict with applicable Federal law.” Loan Agreement § 19.2 (emphasis added); see also id. § 6.3 (“In the event any payment due under this Agreement is delinquent for more than 180 days . . . Lender shall refer the matter to the United States Department of Justice for processing and other Federal action, in accordance with the terms of applicable Federal law.”) (emphasis added). Thus, the Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 47 of 69 36 Court plainly cannot declare that state law governs the United States’ priority in the liquidation under all circumstances.22 Finally, the State of Iowa had the ability to establish and operate its own Exchange and reinsurance and risk adjustment programs, but it elected not to do so. As a result of that choice, HHS was required to establish such programs on behalf of the State. 42 U.S.C. § 18041(c). Having chosen to impose upon HHS the burden and costs of implementing ACA reforms, the State cannot credibly argue that its laws nevertheless control the manner in which HHS does so. Cf. St. Louis Effort for AIDS v. Huff, 996 F. Supp. 2d 798, 807 (W.D. Mo. 2014) (noting that “Missouri has opted not to be in the health insurance exchange business . . . Having made the choice to leave the operation of the exchange to the federal government,” Missouri could not assert its laws in a manner that would “frustrate” CMS’s efforts); see also 45 C.F.R. § 153.310(a)(2) (“Any State that does not elect to operate an Exchange, . . . will forgo implementation of all State functions [relating to risk adjustment]”). 22 The Liquidators’ position may be based on the McCarran Ferguson Act, 15 U.S.C. § 1012(b), under which state law is not preempted by federal law if: (1) the federal law at issue does not specifically relate to the business of insurance; (2) the state law at issue was enacted for the purpose of regulating the business of insurance; and (3) application of the federal law would “invalidate, impair or supersede” the state law. See, e.g., Rhode Island Ins. Insolvency Fund, 80 F.3d at 619 (citation omitted). The Supreme Court has held that, as a result of the McCarran- Ferguson Act, state law may, under certain circumstances, apply the rule of decision for determining the federal government’s priority in an insurance insolvency. See generally United States Dep’t of Treasury v. Fabe, 508 U.S. 491 (1993). But Fabe held only that the McCarran- Ferguson Act causes state insolvency laws to take precedence over the Federal Priority Statute, 31 U.S.C. § 3713, to the extent such laws prioritize policyholder and administrative expense claims. The Court specifically noted that state law would not apply to the extent it prioritized “other categories of claims” over those of the United States. Id. at 493-94. Furthermore, Fabe concerned the United States’ commercial interests as obligee on various surety bonds and not its sovereign interests as administrator of a federal program. Therefore, Fabe did not consider the interplay between the McCarran-Ferguson Act and the Kimbell Foods doctrine. And of course the ACA does specifically relate to the business of insurance so the McCarran-Ferguson Act is irrelevant. “[W]hen Congress enacts a law specifically relating to the business of insurance, that law controls.” Humana Inc. v. Forsyth, 525 U.S. 299, 306 (1999). Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 48 of 69 37 The Choice of Law Claim should be dismissed. CONCLUSION For the foregoing reasons, the First Amended Complaint should be dismissed. Dated: September 6, 2016 Respectfully submitted, BENJAMIN C. MIZER Principal Deputy Assistant Attorney General KEVIN E. VANDERSCHEL United States Attorney WILLIAM C. PURDY Assistant United States Attorney /s/ Serena M. Orloff RUTH A. HARVEY KIRK T. MANHARDT SERENA M. ORLOFF CHARLES E. CANTER TERRANCE A. MEBANE United States Department of Justice 1100 L Street NW, Room 10004 Washington, DC 20005 Telephone: (202) 616-3619 Facsimile: (202) 514-9163 serena.m.orloff@usdoj.gov Attorneys for the United States Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 49 of 69 38 CERTIFICATE OF SERVICE I hereby certify that on September 6, 2016, a copy of the foregoing Brief in Support of Motion to Dismiss was filed electronically with the Court’s Electronic Case Filing (ECF) system. I understand that notice of this filing will be sent to all parties by operation of the Court’s ECF system. /s/ Serena M. Orloff Serena M. Orloff United States Department of Justice Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 50 of 69 EXHIBIT 1 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 51 of 69 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 52 of 69 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 53 of 69 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 54 of 69 EXHIBIT 2 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 55 of 69 KCP-4677688-1 IN THE DISTRICT COURT FOR POLK COUNTY STATE OF IOWA IN RE LIQUIDATION OF COOPORTUNITY HEALTH Case No. EQCVE077579 NOTICE OF DENIAL OF CLAIM Nick Gerhart, the Iowa Insurance Commissioner (“Commissioner”), in his capacity as Liquidator (“Liquidator”) of CoOportunity Health (“CoOportunity”), by and through the Special Deputy Liquidator, Daniel L. Watkins (“Special Deputy Liquidator”), notifies claimant, the United States government, including but not limited to the U.S. Department of Health and Human Services (“HHS”), Centers for Medicare & Medicaid Services (“CMS”), CMS’s Center for Consumer Information and Insurance Oversight (“CCIIO”), the Internal Revenue Service, and any other agency of the United States that may have a claim against CoOportunity (collectively, the “United States”), by and through the United States Department of Justice, pursuant to Iowa Code § 507C.39 that its claim submitted on March 14, 2016 (“United States’ Claim”), is denied for the following reasons. 1. On March 2, 2015, this Court entered a Final Order of Liquidation (“Liquidation Order”) effective February 28, 2015, and appointed the Commissioner as the Liquidator of CoOportunity. 2. Authorized representatives of the United States participated in the timing and the substance of the Liquidator’s Petition for Order of Liquidation and the proposed Liquidation Order before it was presented to the Court. The Liquidator served the United States with a copy of the Court’s Liquidation Order once it was entered. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 56 of 69 KCP-4677688-1 2 3. The Liquidation Order prohibits creditors, including the United States, from “exercis[ing] any form of set-off, alleged set-off, lien, any form of self-help whatsoever” or from “refus[ing] to transfer any funds or assets to the Liquidator’s or Special Deputy’s control” without “further order of this Court.” (Liquidation Order ¶ 45.) 4. The United States, a creditor of the CoOportunity Estate with notice of the Liquidation Order and its prohibitions, has repeatedly set-off, held, and otherwise engaged in self-help to recoup on its claims. This conduct is illegal, improper, and inequitable and violates the Liquidation Order and Iowa law, to the detriment of the fair and timely administration of the Estate. This conduct has resulted in the United States receiving an improper preference over other high-priority claimants, including policyholder level claimants. 5. Because the United States has repeatedly set-off, held, and otherwise engaged in self-help to recoup on its claims, the United States is a “creditor who has received or acquired a preference, lien, conveyance, transfer, assignment, or encumbrance” that is void or voidable under the Iowa Insurers, Supervision, Rehabilitation, and Liquidation chapter. See Iowa Code § 507C.29. 6. Accordingly, as mandated under Iowa Code § 507C.29, the United States’ Claim “shall not be allowed unless the creditor surrenders the preference, lien, conveyance, transfer, assignment, or encumbrance.” Id. 7. Given the United States’ repeated set-offs, unilateral holds on payments owed to the Estate, and self-help conduct in violation of the Court’s Liquidation Order and Iowa law, the Liquidator and Special Deputy Liquidator must deny the United States’ Claim under § 507C.29. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 57 of 69 KCP-4677688-1 3 8. Any as yet un-asserted claim of the United States is untimely because it was not asserted before the already extended bar date (March 15, 2016) for the United States to submit any proof of claim, and any untimely claim is therefore waived. 9. The Liquidator and Special Deputy Liquidator reserve the right to assert additional, supplemental, or amended grounds for denial of the United States’ Claim and to establish the appropriate priority for the United States’ Claim should the United States surrender to the Liquidator all improper, illegal, void, and voidable transfers and preferences it has received. 10. Within sixty days from the mailing of this notice, the United States may file objections to this claim determination with the Liquidator pursuant to Iowa Code § 507C.39. Unless a timely objection is made, the claimant may not further object to this determination. If a timely objection is filed with the Liquidator and the Liquidator does not alter the denial of the claims as a result of the objections, the Liquidator will ask the court for a hearing as soon as practicable and give notice of the hearing by first class mail to the claimant or the claimant’s attorney and to other persons directly affected. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 58 of 69 KCP-4677688-1 4 THOMAS J. MILLER IOWA ATTORNEY GENERAL /s/ Jordan G. Esbrook Jordan G. Esbrook, AT0009996 Assistant Attorneys General Iowa Department of Justice 1305 East Walnut Street Des Moines, Iowa 50319 Telephone: (515) 281-8159 Facsimile: (515) 281-4209 Jordan.esbrook@iowa.gov /s/ Douglas Schmidt Douglas J. Schmidt admitted pro hac vice HUSCH BLACKWELL LLP 4801 Main Street, Suite 1000 Kansas City, Missouri 64112 Direct: 816-983-8147 Fax: 816-983-8080 Douglas.Schmidt@huschblackwell.com ATTORNEYS FOR PETITIONER STATE OF IOWA ex rel. IOWA COMMISSIONER OF INSURANCE NICK GERHART Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 59 of 69 KCP-4677688-1 5 CERTIFICATE OF SERVICE I hereby certify that on this 3rd day of May, 2016, a true and correct copy of the foregoing was mailed via first class mail, postage prepaid, to: Richard T. Freije, Jr. Katelyn Miner Faegre Baker Daniels LLP 300 N. Meridian Street, Suite 2700 Indianapolis, IN 46204 Counsel for The National Organization of Life and Health Insurance Guaranty Association G. Thomas Sullivan Executive Director Iowa Life & Health Insurance Guaranty Association 700 Walnut Street, Suite 1600 Des Moines, IA 50309 Pamela Olsen Administrator of Nebraska Life and Health Guaranty Association Nebraska Life & Health Insurance Guaranty Association c/o Cline, Williams, Wright, Johnson & Oldfather 1900 US Bank Building 233 South 13th Street Lincoln, NE 68508 Martin Swanson Administrator for Health Policy Nebraska Department of Insurance 941 “O” Street, Suite 400 Lincoln, Nebraska 68508 Lourdes A. Grindal-Miller Centers for Medicare & Medicaid Services 7500 Security Boulevard Baltimore, Maryland 21244 Counsel for U.S. Department of Health and Human Services Centers for Medicare & Medicaid Services Serena M. Orloff U.S. Department of Justice Civil Division P.O. Box 875 Ben Franklin Station Washington, DC 20044 U.S. Department of Justice, Counsel for HHS/CMS Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 60 of 69 KCP-4677688-1 6 Serena M. Orloff (duplicate copy due to two mailing addresses) U.S. Department of Justice 1100 L. St. NW, Room 10032 Washington, DC 20008 U.S. Department of Justice, Counsel for HHS/CMS Daniel L. Watkins Special Deputy Liquidator 901 New Hampshire, Suite 200 Lawrence, KS 66044 Andrew R. Anderson Faegre Baker Daniels LLP 801 Grand Avenue, 33rd Floor Des Moines, Iowa 50309-8011 Counsel for National Organization of Life & Health Insurance Guaranty Associations Jordan G. Esbrook Assistant Attorney General Iowa Attorney General’s Office 1305 East Walnut Street Des Moines, Iowa 50319 Counsel for Petitioner State of Iowa, ex. rel. Iowa Commissioner of Insurance Nick Gerhart /s/ Douglas Schmidt Attorney Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 61 of 69 EXHIBIT 3 Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 62 of 69 IN THE IOWA DISTRICT COURT FOR POLK COUNTY STATE OF IOWA IN RE LIQUIDATION OF COOPORTUNITY HEALTH Case No. EQCE077579 OBJECTION TO DENIAL OF PROOF OF CLAIM Pursuant to Iowa Code § 507C.39, the United States, on behalf of the United States Department of Health and Human Services (“HHS”), the Centers for Medicare & Medicaid Services (“CMS”), and CMS’s Center for Consumer Information and Insurance Oversight (“CCIIO”), submits this Objection to the Denial of its Proof of Claim (“Denial of Claim”). Background 1. On March 2, 2015, the District Court for the State of Iowa (“State Court”) entered a Final Order of Liquidation (“Liquidation Order”) against CoOportunity Health, Inc. (“CoOportunity”) in case no. EQCE077579 (the “Liquidation Proceeding”). The State Court appointed Iowa Insurance Commissioner Nick Gerhart as the Liquidator and Dan Watkins as the Special Deputy Liquidator (collectively, the “Liquidators”) of CoOportunity. 2. In or around June 2015, disagreements arose between the United States and the Liquidators regarding payment streams arising under the Patient Protection and Affordable Care Act (“ACA”), Pub. L. No. 111-148. As part of its monthly payment and collections process for issuers of qualified health plans, CMS “nets” certain ACA-related payables and receivables pursuant to 45 C.F.R. § 156.1215(b) (the “netting regulation”). CMS informed the Liquidators that, pursuant to the netting regulation and established legal authority relating to offset, it would continue to net these payment streams prior to disbursing payments to the CoOportunity estate. Subsequently, CMS also informed the Liquidators that it was analyzing its right of offset for Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 63 of 69 2 amounts due under the CO-OP Loan Agreement between CoOportunity and CMS and, to that end, had implemented an administrative hold on CoOportunity’s accounts. The Liquidators informed the United States that they believed netting and offset were not permissible. 3. Over the next several months, the parties worked to reach a consensual resolution of their disagreements. These discussions concluded unsuccessfully in January 2016. 4. CMS continued to net CoOportunity’s eligible ACA-related payables and receivables pursuant to the netting regulation throughout the liquidation proceedings, consistent with its statements to the Liquidators. 5. In mid-March 2016, after concluding its analysis of setoff with respect to the CO-OP loans, the United States exercised setoff to collect the principal loan amount of $14.7 million due under the Start-up Loan. The United States did not, however, exercise setoff with respect to the more than $130 million due under the Solvency Loan. On March 22, 2016, CMS sent the Special Deputy Liquidator a letter notifying him that the Start-up Loan had been collected by way of setoff and requesting that he contact CMS “within 14 days if you have any questions or concerns regarding the content [of] this letter.” The Liquidators did not contact CMS in response to the notification. 6. On March 14, 2016, the United States timely submitted its Proof of Claim to the Liquidators, asserting claims for $131,520,171.13 under the Solvency Loan and $8,279.37.37 in federal reinsurance contributions, 45 C.F.R. § 153.405(c), as well as contingent and unliquidated claims for reconciliation of cost-sharing reduction overpayments and risk adjustment payables. 7. On May 3, 2016, the Liquidators served CMS with the Denial of Claim. The same day, they filed a lawsuit in the United States District Court for the Southern District of Iowa Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 64 of 69 3 seeking declaratory and injunctive relief regarding the United States’ exercise of setoff and other matters. Objection to Denial of Claim 8. The Liquidators do not dispute either the existence or the amount of the debts identified in the United States’ Proof of Claim or previously collected through netting and offset. Rather, the sole articulated basis of the Denial of Claim is the Liquidators’ contention that the United States’ exercise of netting and setoff “resulted in the United States receiving an improper preference over other high-priority claimants, including policyholder level claimants.” Denial of Claim ¶ 4. This conclusion is fundamentally inconsistent with applicable statutory, regulatory, and common law. 9. The right of a creditor such as the United States to use offset to collect mutual debts owed by an insolvent debtor is firmly established under federal law. See, e.g., United States v. Munsey Trust Co. of Washington, D.C., 332 U.S. 234, 239 (1947) (“The government has the same right ‘which belongs to every creditor, to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him.”) (citations omitted); United States v. DeQueen & E. R. Co., 271 F.2d 597, 599 (8th Cir. 1959) (acknowledging the government’s right of “setoff, without limitation”); United States v. Tafoya, 803 F.2d 140, 141- 42 (5th Cir. 1986) (“The right of setoff is ‘inherent in the United States Government,’ and exists independent of any statutory grant of authority to the executive branch.”); Berger v. Cas’ Feed Store, Inc., 543 N.W.2d 597, 599 (Iowa 1996) (“general right of setoff is well established”); 45 C.F.R. § 156.1215(b) (“[CMS] may net payments owed to issuers . . . against amounts due to the Federal or State governments from the issuers” for specified ACA programs); 42 C.F.R. Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 65 of 69 4 § 401.607(a)(2) (“CMS recovers amounts of claims due from debtors . . . by . . . [o]ffsets against monies owed to the debtor by the Federal government where possible.”). 10. Iowa state law also expressly allows—and even requires—offset. The Iowa Liquidation Act states that “mutual debts or mutual credits between the insurer and another person in connection with an action or proceeding under this chapter shall be set off and the balance only shall be allowed or paid.” Iowa Code § 507C.30(1) (emphasis added); see also In re Liquidation of Home Ins. Co., 953 A.2d 443, 453 (N.H. 2008) (rejecting argument that setoff should be disallowed because “the word ‘shall’ is “unambiguous. It is mandatory, not permissive, language.’ Had the legislature intended to vest the liquidator with the discretion to disallow setoffs, “it would have chosen more permissive language, such as ‘may’ or ‘might.’ Accordingly, we decline to read [the liquidation act] to authorize discretionary disallowance of otherwise qualifying setoffs.”) (citations omitted). 11. The CO-OP Loan Agreement between CMS and CoOportunity also unequivocally preserves and reinforces CMS’s right of offset, providing as follows: Right of Set-Off Notwithstanding any other provisions of this Agreement to the contrary, in the event any Event of Default is not cured . . . within applicable notice and cure periods, Lender shall have at its disposal the full range of available rights, remedies and techniques to collect delinquent debts . . . including . . . administrative offset . . . .” Loan Agreement § 19.12 (emphasis added). 12. Disregarding this body of authority, the Liquidators contend that the United States’ exercise of offset and netting was “illegal, improper, and inequitable” because it “resulted in the United States receiving an improper preference over other high-priority claimants, including policyholder level claimants.” Denial of Claim ¶ 4. Courts have repeatedly rejected Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 66 of 69 5 the assertion by liquidators that a lawful setoff results in an improper preference or circumvents a state priority scheme. See, e.g., In re Liquidation of Home Ins. Co., 972 A.2d 1019, 1022-23 (N.H. 2009) (noting that “setoff is an exception to the [priority framework] for discharging claims against an insolvent debtor”); In re Liquidation of Realex Grp., 210 A.D.2d 91, 94 (N.Y. App. Div. 1994) (“Although permitting offsets may conflict with the statutory purpose of providing for the pro rata distribution of the insolvent’s estate to creditors, the Legislature has resolved the competing concerns and recognized offsets as a species of lawful preference. Indeed, if an offset is otherwise valid, there would seem to be no reason why its allowance should be considered a preference: it is ‘only the balance, if any, after the set-off is deducted which can justly be held to form part of the assets of the insolvent.’”) (emphasis added) (quoting Scott v. Armstrong, 146 U.S. 499, 510 (1892)); Prudential Reinsurance Co. v. Superior Court, 3 Cal. 4th 1118, 1124-25, 842 P.2d 48 (1992) (adopting position of “the majority of state and federal courts addressing the statutory right of setoff” and holding that setoff provision “may not reasonably be construed as conditioning [a creditor’s] right to set off on the insolvent insurer’s ability to pay in full the claims of those in higher priority classes”); see also In re Agriprocessors, Inc., 547 B.R. 292, 325 (N.D. Iowa 2016) (“Setoffs are not ‘transfers’ . . . and, therefore, are not avoidable as preferences.”). 13. Nor can a setoff be construed as an “improper preference” or other voidable transfer under Iowa Code § 507C.29. First, setoff is expressly authorized under Section 507C.30; axiomatically, it is not “improper” or “voidable,” and it is not a preference. See Scott, 146 U.S. at 510 (“Where a set-off is otherwise valid, it is not perceived how its allowance can be considered a preference [.]”). Second, Iowa law defines a preference as “a transfer of the property of an insurer to or for the benefit of a creditor . . . within one year before the filing of a Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 67 of 69 6 successful petition for liquidation . . . the effect of which transfer may be to enable the creditor to obtain a greater percentage of this debt than another creditor of the same class would receive.” Iowa Code § 507C.28. Putting aside the obvious fact that the offsets at issue occurred after—not before—the filing of the Liquidation Petition (indeed, the Liquidators do not challenge netting that occurred prior to the Liquidation Petition), the offset amounts could not have constituted a transfer of estate assets because “it is only the balance, if any, after the set-off is deducted, which can justly be held to form part of the assets of the insolvent.” Scott, 146 U.S. at 510 (emphasis added). For the same reason, the offset did not enable the United States to recover a “greater percentage” of its claims than other class 3 creditors because (1) all creditors possess the same rights of offset, and (2) it is only the balance of debts after offset is exercised that determines the United States’ claims against the estate. Id.; see also Iowa Code § 507C.30 (“mutual debts or mutual credits . . . shall be set off and the balance only shall be allowed or paid”) (emphasis added). 14. As these authorities make clear, the United States’ exercise of a lawful setoff was not an “unlawful preference” and did not circumvent the Iowa priority scheme. Conclusion The Liquidators have not cited any authority that permits them to void a lawful setoff or deny the valid, uncontested claims of a creditor that has lawfully exercised such setoff. 1 Accordingly, the United States respectfully objects to the denial of its Proof of Claim. 1 In the absence of any legal support for their contention that lawful setoff amounts to a voidable preference, the Liquidators point to a provision of the Liquidation Order purporting to prohibit the federal government from conducting setoff “without further order of this court.” Liquidation Order ¶ 45. Even if this provision could transform a lawful setoff into an unlawful preference (it cannot), the Liquidators do not explain how it can be construed to govern the actions of the United States given the firmly established rule that the United States is immune from judicial proceedings, including those seeking to “‘restrain the Government from acting or to Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 68 of 69 7 Dated: July 1, 2016 Respectfully Submitted, BENJAMIN C. MIZER Principal Deputy Assistant Attorney General RUTH A. HARVEY Director /s/ Terrance A. Mebane ___ SERENA M. ORLOFF TERRANCE A. MEBANE United States Department of Justice 1100 L Street NW Washington, DC 20530 TEL: (202) 307-0493 FAX: (202) 307-0494 Email: Terrance.A.Mebane@usdoj.gov Counsel for the United States compel it to act,” absent a waiver of sovereign immunity. Hagemeier v. Block, 806 F.2d 197, 202 (8th Cir. 1986) (quoting Dugan v. Rank, 372 U.S. 609, 620 (1963)). The United States has not waived its sovereign immunity for insurance proceedings in state court. See, e.g., New Hampshire Ins. Guar. Ass’n v. Markem Corp., 676 N.E.2d 809, 813 (1997) (“Sovereign immunity is an ancient doctrine, which applies with full rigor today[] . . . [which] protects the public treasury against money judgments and public administration from interference by the courts at the behest of litigants except in instances and by procedures the Legislature has authorized.”); Application of Lewis, 512 F. Supp. 1146, 1149 (S.D.N.Y. 1981) (vacating restraining order issued by state court because the “Superintendent [of Insurance] points to no waiver of sovereign immunity upon which [the state court restraining order] against the United States rests”). Thus, the Liquidation Order could not enjoin the United States in the conduct of its lawful actions, nor could it require the United States to seek permission prior to taking such actions. See, e.g., TransAmerica Assur. Corp. v. Settlement Capital Corp., 489 F.3d 256, 264 (6th Cir. 2007) (“state court . . . cannot compel or require non-ministerial action on the part of the federal government[] absent a waiver of sovereign immunity”); Metro. Life Ins. Co. v. Muldoon, No. 06-2026-CM, 2009 WL 211930, at *3 (D. Kan. Jan. 23, 2009) (“Sovereign immunity barred the [state] court from ordering the United States to act”); Settlement Funding, LLC v. Garcia, 533 F. Supp. 2d 685, 690 (W.D. Tex. 2006) (“In the absence of a waiver of sovereign immunity, a court lacks subject matter jurisdiction over the United States. Thus, the Court finds that the [court’s order] is not binding or enforceable against the United States[.]”) (citing Jeanmarie v. United States, 242 F.3d 600, 602 (5th Cir. 2001)). Case 4:16-cv-00151-RGE-CFB Document 64 Filed 09/08/16 Page 69 of 69