The instant proceeding seeks a final accounting to wind up the affairs of the Hutton Nursing Home, which closed in 2004. Pursuant to a conference held by the prior Individual Assignment System Justice, the parties were directed to make submissions with respect to whether the sum of approximately $449,000, which represented the amount of medicaid underpayments determined as a result of a successful article 78 proceeding, could be retained by the Department of Health to recoup estimated medicaid overpayments and tax assessments, or whether it should be paid to the current receiver, Benedictine Hospital, or to Charles Glessing, the former receiver and owner of the assets comprising the Hutton Nursing Home. The attorneys for the Hutton Nursing Home in the successful article 78 proceeding have moved to intervene to establish their charging lien on the proceeds of that litigation.

The relevant history of the Hutton Nursing Home goes back more than two decades. Charles Glessing was appointed receiver of the nursing home in 1983 in conjunction with an agreement to purchase the nursing home. While it appears that at some time Mr. Glessing actually acquired the assets of the home, he was never approved as the established operator of the home by the Department of Health. As such, he continued to operate the nursing home as a receiver. Petitioner Benedictine Hospital was appointed successor receiver in conjunction with its agreement to purchase the nursing home in 2001. Petitioner was not approved as the established operator, and due to significant monetary losses in operating the home, petitioner closed the home in March, 2004.

In compliance with a judgment of Supreme Court, Albany County, Benza, J. in 2003, which was affirmed in Matter of St. James Nursing Home v De Buono, (12 AD3d 921 [Third Dept., 2004]), the Department of Health determined that the Hutton Nursing Home was due approximately $449,000 in additional medicaid reimbursement for the years 1995 through 1997. However, the Department of Health has refused to pay such sums to either Benedictine Hospital or Mr. Glessing, claiming a right to offset such sums against later debts. It is noted that the Department of Health relies for the most part upon estimates of claimed overpayments and taxes due, claiming that approximately $443,000 is due from the nursing home. No explanation has been given as to why the additional $6,000 has not been paid out to the current or former receiver.

The Department of Health claims that $252,650.81, including interest and penalties, is due pursuant to the cash receipts assessment imposed by Public Health Law §2807-d. It is noted that $97,239.64 of such sum is estimated rather than the product of a final determination. It is further noted that the estimated taxes are based upon estimated [*2]gross receipts for the last quarter of the home's operation which are approximately double the historical revenues of the facility as reflected in the final tax assessments for prior periods. However, the final accounting indicates that actual annualized revenues for the last quarter of the home's operation were significantly less than the revenues for the prior two years. The Department of Health has not offered any factual basis supporting the estimates.

The Department of Health also claims that $190,475.90 is due for alleged medicaid overpayments for the period from 2002 until the home closed. Such claim is based primarily upon an estimate of the likely reduction in the medicaid reimbursement rate which will result from an audit of the nursing home's Patient Review Instruments, which reflect the level of care needed by the home's patient case mix. The patient case mix has a direct and significant impact upon the medicaid reimbursement rate. However, as above, the Department of Health has not offered any basis for its estimates nor does it appear that such estimates are based upon even a preliminary audit.

It is uncontroverted that the Department of Health has a general common law right to recoup past medicaid overpayments from current and future medicaid payments, which include the proceeds of the prior article 78 proceeding (see e.g. Matter of Daleview Nursing Home v Axelrod, 62 NY2d 30, 33 [1984]). However, petitioner and Mr. Glessing object that there is no right of recoupment until there has been a final determination of the specific amount due and owing. None of the parties have cited any legal precedent directly on point. 18 NYCRR part 518 is generally applicable to recoupment of medicaid overpayments and requires a "final" administrative determination as to the amount overpaid. Such determination is then subject to an administrative hearing and judicial review. Pursuant to 18 NYCRR § 518.8, the Department may not commence recoupment until at least 20 days after issuance of a final audit report or notice of agency action. However, it has been held that the regulations of the Department of Social Services at title 18 of the NYCRR are not applicable to audits of Patient Review Instruments (see Matter of Blossom View Nursing Home v Novello, 4 NY3d 581, 591-596 [2005]). Therefore, while not specifically applicable to the alleged overpayments involved herein, such regulations offer significant insight into acceptable methods of recoupment of overpayments.

The regulations which are applicable specifically provide "any rate of payment certified by the State Commissioner of Health *** will be construed to represent a provisional rate until such audit is performed and completed, at which time such rate or adjusted rate will be construed to represent the audited rate." (10 NYCRR § 86-2.7). Such regulation clearly indicates that the provisional rate continues until an audit is completed (see State of New York v Hollander, 245 AD2d 625, 626 [Third Dept., 1997]). Moreover, the general common law principles applicable to setoffs, which are equivalent to recoupment, require that the claim be "due and payable [as opposed to] contingent, possible and in futuro" (Matter of Northville Industries Corp. v State of New York, 14 [*3]AD3d 817, 818 [Third Dept., 2005]). Mere assertion of a contingent or speculative claim will not support a setoff (id.). The Department of Health has not offered any authority, either statutory, regulatory or case law, indicating that it may recoup speculative pre-audit alleged overpayments from the amount due pursuant to the judgment in the prior article 78 proceeding. The Court therefore finds that the Department of Health may not presently recoup the asserted $190,475.90 from the $449,000 due to the Hutton Nursing Home.

Because there has been no determination of the amount due, it appears that the Department of Health is actually attempting to withhold payment pending a final determination of the amount of overpayments. Withholding of payments for medicaid services is authorized by 18 NYCRR § 518.7 under very limited circumstances involving fraud or willful misrepresentation. The right to withhold payments is strictly circumscribed and requires compliance with numerous procedural protections which have not been followed herein. Moreover, the right to withhold is temporary and requires an agency determination within 90 days of commencement of the withholding. Such period expired long ago. The Court therefore finds that the Department of Health may not withhold the asserted $190,475.90 from the $449,000 due to the Hutton Nursing Home either.

The general principles discussed above are also applicable to the $252,650.81 in delinquent taxes claimed due pursuant to the cash receipts assessment imposed by Public Health Law § 2807-d. However, the statute specifically authorizes the commissioner to collect an estimate of the amount of taxes due if the estimated payments made by a hospital, which includes a nursing home, are less than a certain percentage of the amount which the commissioner has determined is due, based upon evidence of prior period moneys received or evidence of actual receipts for the relevant period (Public Health Law § 2807-d [6]). It is uncontroverted that petitioner did not make any payments of the taxes due during the last quarter of its operation of the nursing home or for several months prior thereto. As such, the Department of Health would be authorized to withhold the estimated amount of taxes due upon compliance with the procedures dictated by the statute. Public Health Law § 2807-d (6) (d) requires the commissioner to provide a nursing home with notice of any estimate of an amount due at least three days prior to collection of such amount. The notice is required to contain the financial basis for the commissioner's estimate. The Department of Health gave petitioner notice that the payments were insufficient by filing a statement of the amounts due as a claim in the final accounting proceeding. However, the notice does not provide any financial basis for the estimates, which, as noted above, appear grossly excessive. The only other evidence of notice by the Department of Health is an indication that a copy of a letter to the prior assigned Justice, which stated an intent to recoup the unpaid taxes, was sent to the attorneys for petitioner within the context of this proceeding. Such notice was not addressed to the nursing home and failed to set forth any financial basis for the estimated [*4]amounts claimed due. It is therefore determined that the Department of Health has failed to show that it is presently entitled to withhold the sum of $97,239.64 from the amount due to the Hutton Nursing Home pursuant to the prior article 78 proceeding.

The Department of Health also seeks to withhold $155,411.17 from the payment. By memorandum of law, the Department of Health contends that such amount is based upon the nursing home's own assessment returns filed with the Department. However, no admissible factual basis for such representation has been submitted, nor does the claim submitted in the instant accounting proceeding state the source of or financial basis for the amounts set forth as due. As such, the claim for $155,411.17 also does not comply with the procedural requirements of Public Health Law § 2807-d (6) (d). It is therefore determined that the Department of Health has not shown any present legal right to recoup alleged medicaid overpayments or withhold payment of medicaid reimbursement due to the Hutton Nursing Home based upon the cash receipts assessment.

Such determination is based entirely upon procedural deficiencies on the part of the Department of Health in its attempts to recoup overpayments and withhold delinquent taxes. As such, the determination is without prejudice to the Department of Health providing proper notice as required by Public Health Law § 2807-d (6) (d) and/or issuing a determination of the amount of medicaid overpayments following an audit prior to the payment required herein.

The Court must determine to whom the medicaid reimbursement funds should be paid in the event that the Department of Health does not cure the procedural deficiencies before the period for making the required payment expires. Mr. Glessing has shown a strong equitable claim to the funds. The reimbursement funds are attributable to the period from 1995 to 1997. Had they been paid at that time, it does not appear that petitioner would have any right to such funds, as its status as a contract vendee and receiver did not arise until several years later. Moreover, pursuant to the purchase agreement and receiver agreement, Mr. Glessing remained liable for any medicaid underpayments for the period prior to petitioner's receivership. It is certainly compelling that Mr. Glessing should be entitled to the profits generated by the nursing home during that period of time if he is responsible for its losses.

However, Mr. Glessing's equities are tempered by the nature of the business which he attempted to sell to petitioner. A nursing home is subject to considerable regulation by the Department of Health. Its regulations, at 10 NYCRR § 600.9, prohibit anyone who has not received establishment approval from participating in the total gross income or net revenue of a nursing home. As noted above, Mr. Glessing never obtained establishment approval, despite operating the nursing home as a receiver for nearly 20 years. As such he could not lawfully receive the profits from the home. Consistent with such principle, the receiver agreement entered into between petitioner, Mr. Glessing and the Department of Health provided that the proceeds of all administrative appeals of medicaid reimbursement rates, regardless of whether they were for periods before or after [*5]commencement of petitioner's receivership, were to be retained by the new receiver and not distributed to Mr. Glessing until termination of the receivership. At that time, any remaining profit would be distributed to Mr. Glessing, subject to approval of the Public Health Council.

Such contractual provisions are not inconsistent with the purchase agreement, as argued by Mr. Glessing. While the purchase agreement gave Mr. Glessing the right to control challenges to earlier reimbursement rates, it was silent with respect to the distribution of the proceeds of such challenges. Certainly, if a distribution of income from earlier years was legal, the parties could have written the agreement to provide for the immediate distribution of the proceeds of rate appeals. They did not. As such, the Court finds that the proceeds from the prior article 78 proceeding should be paid to petitioner.

The law firm Harter Secrest & Emery, LLP has moved to intervene to enforce its charging lien on the proceeds of the prior article 78 proceeding. There being no opposition, intervention shall be granted. Such application stands on a different footing from the other claims against the receiver, which pursuant to the conference conducted by the prior IAS Justice, have been bifurcated to resolve issues of priority and amount of claims following determination of whether the proceeds of the prior article 78 proceeding should be paid to the receiver. Notwithstanding the above determination that the proceeds should be paid to the receiver, it is possible that the Department of Health may be able to complete audits and comply with the procedures of Public Health Law §2807-d prior to the time set for making the payments. Under such circumstances, the issue of the priority of the attorneys' charging lien, which governs whether the lien takes precedence over the Department of Health's rights to recoup or withhold moneys, should be determined at this time.

An attorney's charging lien creates a security interest in the proceeds of successful litigation (see Chadbourne & Parke, LLP v AB Recur Finans, 18 AD3d 222, 223 [First Dept., 2005]). Such interest takes priority over most other liens or claims, especially when the attorney's services created the fund in question (see LMWT Realty Corp. v Davis Agency, 85 NY2d 462, 468 [1995]). Indeed, an attorney's charging lien is superior to the prior lien of a governmental entity asserted pursuant to a statute providing that the government's claim "shall ... be prior to all other liens and claims except the claim of a mortgagee of record named in such policy" (General Municipal Law § 22 (2); LMWT Realty Corp. v Davis Agency, 85 NY2d at 470). The charging lien also takes priority over rights to setoff the judgment against another judgment or debt where the setoff is not related to the fund recovered by the attorney (cf. Banque Indosuez v Sopwith Holdings Corp., 98 NY2d 34, 43-44 [2002]).

While the charging lien and at least some of the claims of the Department of Health arise out of medicaid reimbursement issues, the Court finds that the $449,000 proceeds from the judgment challenging 1995 through 1997 medicaid reimbursement [*6]rates are entirely separate and distinct from the Department's claims of medicaid reimbursement overpayments from 2002 through 2004. The proceeds are clearly entirely separate and distinct from the claims of delinquent cash receipts assessments. Moreover, the services of Harter Secrest & Emery created the fund from which the Department seeks to recoup the alleged overpayments and withhold unpaid taxes. Under such circumstances there would be no windfall to Harter Secrest & Emery if they were paid for services rendered. The only windfall would be to allow the Department to offset the entire judgment without payment for the attorney's services. It is therefore determined that the charging lien takes priority over all other claims to the $449,000 proceeds of the article 78 proceeding.

The Department of Health also contends that the charging lien has been discharged or waived by stipulation entered into with respect to a claim for an award of attorney's fees brought pursuant to 42 USC § 1988 based upon alleged deprivations of civil rights. The parties agreed to settle such claim for $120,000. Nothing in the stipulation could be construed as determining that the sum of $120,000 was the value of all attorney's services rendered to the petitioner nursing homes in the article 78 proceeding. Rather, it constituted an agreement with respect to the amount of the fees for which the Department would be directly liable due to its alleged violation of the law. The instant claim does not seek to recover attorneys fees from the assets of the Department of Health. Instead, the attorneys seek to enforce their right to be paid from funds of their client, the nursing home. As such, the stipulation does not discharge the charging lien.

It must, however, be considered in determining the amount of the lien which has priority over all other claims. In the absence of any contrary evidence, the full amount of the $120,000 payment must be deemed to have been paid toward the attorneys fees owed by the petitioners in the article 78 proceeding. As such, the amount of the lien will be reduced by the pro rata share attributable to the Hutton Nursing Home recovery. The intervenor has not offered any evidence from which the amount of the pro rata share could be determined. Therefore, the issue of the amount of the charging lien shall be determined within the context of the second phase of the final accounting proceeding.

Accordingly it is

ORDERED that the Department of Health shall pay the proceeds of the prior article 78 proceeding to petitioner within 30 days of service of a copy of the instant decision and order, together with notice of entry unless the Department of Health undertakes the procedures indicated herein for the recoupment of overpayments or collection of assessments prior to expiration of such period, and it is further

ORDERED that the intervenor Harter Secrest & Emery is determined to have a charging lien which has first priority on the proceeds of the prior article 78 proceeding. The amount of such lien shall be determined within the accounting proceeding.

This shall constitute the Decision and Order of the Court. All papers are returned to the attorneys for petitioner, who are directed to enter this Decision/Order without notice and to serve [*7]all appearing counsel with a copy of this Decision/Order with notice of entry.

Dated: Troy, New York

January 10, 2007_______ /s/ George B. Ceresia, Jr.______

George B. Ceresia, Jr.

Supreme Court Justice