in these new standards were inconsistent with the agency's past policies and interpretations and therefore we c the administrator disallowed the old german towns loss on two grounds one was a related parties ground they found that they were related both before the merger and after the merger under a continuity control theory and the other both the continuity of control test and the requirement that statutory mergers meet bonafide sales were not articulate it until the two thousand program memorandum and the definition put into the provider reimbursement annual in two thousand and those standards were flatly inconsistent with the prior agency policy and we think the best evidence for that comes from the government itself in the old i g issued a report in one thousand nine hundred seventy analyzing hospital losses under existing medicare rules the oh i just said you want to fix this agency you need to get congress to change statute and that and c m s are hicks agreed with that and it's comments to the report and said yes we're going to go in and we're going to change the statute and they succeeded in getting congress to do that and the statute was changed effective december one thousand nine hundred ninety seven but once that happened then the agency said oh but we still have these losses from prior years how can we set about to disallow them from our point of view and that's when they started to reinterpret the prior agency rules and they really want to focus on the the bonafied fail piece because that's the one that seems to give another court some problem our position is that a statutory merger is very different from a bona fide sale and the agency set upright line distinction between the two of these in january seventy nine issues the bona fide sale rule insead be wary of seventy nine it issued statutory merger rule and they didn't reference each other new you know they didn't say when they issued the statutory merge rule that it had to be a bona fide sale as a matter of fact the preamble language to that seventy nine rule only said it has to be a bona fide transaction we do realize the statutory merger reg references subsection f of the regulation which is the section that deals with recognition gains or losses the concept of a bona fide transaction doesn't include reasonable consideration or prior to two thousand that was not in the provider reimbursement manual and prior to two thousand bonafide sale meant sale thing that means a sale between unrelated parties the other definition that has showed up from time to time prior to two thousand is that a bona fide sale is a sale made in good faith for consideration without notice of defect in title by unrelated parties we contend that if you find we have to meet bona fide fail criteria this transaction met those criteria latest in the sense that if they were writing on a blank slate they could have done that but that was not the agency's interpretation if you look at the medicare in a new hearing manual which was issued to tell intermediaries how to interpret the statutory merger regulation and that was issued in one thousand nine hundred seven all it said was if the parties are unrelated prior to the merger again our loss will be recognized to just appreciation for that for the acquiring entity and and again a lot and let me let me focus on what was really going on here and let me see if you agree i just jotted down something as i was working up this case to try to get an overview and it seemed to me that old germantown which was a nonprofit on stock corporation concluded that it was unable to carry to continue to carry out its own mission effectively and by its merger it was seeking to assure the carrying out of that accomplish this transfer of control of its assets to the network correct while the network may have understandably be in been interested in some continuity the essence of this whole transaction was the towns board who negotiated the deal with the network and indeed their fiduciary duty was not to maximize the consideration paid by the network but rather to assure the success of all german town's mission in the future that is delivering quality health services to its community and the board might well decide to take less from an acquirer from inquirer with greater resources than from a weaker successor because what they were interested in doing was assuring the continued success of their mission but and as part of doesn't that justify the assuming that bona fide transaction has a reasonable compensation component and i realize you maintain otherwise but assuming it does doesn't mean that this transaction the administrator has pointed to the gap between the value of the assets transfer transferred  and the consideration given and there's a significant gap thirty thirty thirty million dollar gap there is doesn't that suggest that this is not that the administrator was within his or her discretion to find that this was not a bona fide transaction or reasonable consideration we think not we disagree with that in the first place when german town or german town issued the i think it had a number of items that it was looking for one of which was fair value for its assets and the other thing that was very important  one it was really looking for was continuity of control and land part of that was that the same individuals who control german town i e the president of the facility would remain as the chief executive officer of the new facility and and rather although i think one might look at this as a part of the mission was to continue the mission of serving the community it was not divorce from the individuals wanting to retain continuity of control how do you answer and they didn't say what might have been a bedder proposal  all the board members i know there's reference to all the board members who wanted to carry over could well there's also testimony in the record that most of those board members wanted to resign they did not want to carry over for only six board members that carried over which was fifteen percent of the new board i know and then on board it depends on who the board members are and sometimes the board members who are the leading board member may have been the one but that carry over the new board had to exercise any delegated authority to use it had totally under the control of the parent einstein any any delegated authority that had were were was only a recommended board it could only be  subject to einstein's control i would like to address the primary health system offered by can happen then it should do that sure because you said that was a better looked like a better offer them up because if they had taken the primary health offer it would have gotten fifteen million dollars which didn't even cover half of all german towns debt they would've lost you know given up their hospital assets they they had in down the funds they couldn't use it's their end funds to pay off the debt the endowment funds likely would have been forfeited because they no longer had the hospital assets they weren't doing it anymore so the german old german town would have been left with a lot of debt and no assets i don't think that's a say that the deal was struck so that they would get more from medicare or the that this was the deal was structured entirely importan the medicare rules and if you look at the geller letter in the file which we cited to in the statutory merger you take the consideration of the liabilities that are assumed and that's what you use to determine whether there's a game or a loss and even in the letter that we cite which deals with the consolidation the he said the consideration is less than the fair market value but you still allocated all and and determine the gain or the loss why don't we hear from  and let me begin this way that the medicare act pays providers for their actual reasonable costs and one of those costs of course is depreciation on the use of equipment used to to serve medicare patients now there will be times when fides that's different from the script depreciation schedule you recover the gain or you pay the last true up with the actual cost of the provider work now it's apparent from that that you need some sort of transaction that actually shows you what the real costs were to justify medicare making the payment or or regain or regaining the game you need a transaction that is for fair value as a transaction at arm's length between unrelated parties so for that reason medicare has an actor or one three point one three four which lists the circumstances in which an adjustment to depreciation will be recognized one of them being a point of sale and then on top of that  fanatic or one three one three four l is now k and regulations that now at the relevant time which governs mergers and consolidations and transfers of capital stock and the the was no transfer of control of these assets from old germantown to the network when as a result of the transaction there was no germantown old german town question comes from four one three point one seven which is the related party rule which tells you that the relevant standard is is there significant continuity of control there doesn't have to be absolute control that is has to be some significant continuity from the old owners for some inflation or the potential for some incentive not to strike a fair price and so here you have significant control because you have the chairman and the vice chairman i believe of the board continuing you have the president continuing as part of the transaction itself all germantown in discussions with einstein to create new german town or german town with einstein negotiated six million dollars but not for itself negotiate six million dollars to go to the new and so so you have to look not just at the formality of the old corporation no longer existing you have to look at you know the principles about of that organisation and what happens to the principles of that organisation and many of them to continue t membership from all germantown has reopened minority six unrelated i mean otherwise unrelated individuals and part you're talking about six otherwise unrelated operation absolutely and that's that's ultimately the point that i'm trying to get to is that the notion that all germantown set up this transaction this way to continue the hostiles mission is not a bad thing they're not bad people the kind of transaction that allows you to calculate whether there's some difference in the depreciation has occurred and it is not because this is now a transaction where there was a real exchange a fair market value it's not a transaction that was truly at arm's l asked you and it's obviously perfectly logical he says they only have six members of the new board and he says half and i think it's forty five or forty members old germantown have the right to appoint one half of the board of the new entities six of the members came directly from the old german town board but and the top of that you can't do the math my head but whatever gets you up to one half were existence all germantown ensures that that new german town would serve the old the old entities mission that is an element of control and entirely silly story reason ex pats control but nonetheless it is an that they wouldn't be irrelevant but but you look at the board you look at the management team and there was constant in all of these folks are there at the pleasure of the network they don't they circumstances to determine if there's some continuity of what is significant control again because it's a prophylactic role you're drawing the box broadly new to try to to to broadly take out all law that the administrator acquired was applied retroactively without notice and comment and rule making that the easiest and most correct answer is if there was isn't when the transaction happened i mean suppose in fact the einstein people use whatever power they have and knock off all of the old german town people on the board with that matter for purposes of the continuity of control issue i think that the way you look at it would be what the parties know at the time that the transaction is completed so if if the parties were thinking of the time of the transaction and at the time of this transaction they were not attempting to get their consideration there was no consideration of trying to get fair market value they were attempting to ensure that there was continuity of control so if that later proved to be incorrect that's not this record but if it later proved to be incorrect i just don't think that the relevant it goes to what they're thinking when they're negotiating the transaction at the time now your friend raise not conclusive evidence that they were not attempting to get fair consideration now there may have been reasons ultimately that p h c could not have gone forward but they decided in less than five business days that they weren't even going to try to pursue p h c to try to figure out some other way to restructure the transaction to maybe only gain forty million dollars and the fifty six million dollars on the table or something given the huge discrepancy you would think somebody motivated to get reasonable consideration or motivated to maximize i would like to pick up with the last point mr mack of and then raised about they didn't try to get maximum consideration that is a criteria that didn't exist anywhere till that two thousand program memorandum came out and what we had in the record of this case is testimony from former agency officials the ones that were in charge of the statutory merger regulation in the manual provision that said that they were using the assumption of liabilities as the consideration there was no way in a statutory merger you could maximize the consideration because your liabilities are what they are on the books the government says  germantown should have worked harder to get more additional compensation if they had gotten any more money from einstein and it just would have gone to einstein by operation of lot the time of statutory merger so when he said there  the record that he said demonstrate the old he was eleven talent was aware of the fair consideration requirement i believe that the pages he's talking about refer to there were rumors in the industry at the time that medicare or the intermediaries were trying to impose some kind of continuity of control argument so they were they were they were aware that i mean there were only six board members that were interested anyway in serving on the new board but they wanted to make sure they didn't have a lot of representation on the new board that they were aware of but just because they were aware of the continuity control provisions doesn't mean it was a valid policy yes and and and as for any contention that the parties were related prior to the transaction the government sort of fabricated that from the fact they both signed the definitive agreement and then worked to make it happen there were there were two separate boards there were no overlapping board members and each agency was was sponsible for their orders so i do not think the parties were related either prior to the merger or under continuity of control theory in terms of the six million dollars that they said they were an old german town was trying to negotiate for i'm kind benefits that was in the original offer that einstein made a lot of the terms that the government said the old german town was trying to get they were all in the original einstein offered to us so obviously einstein thought it was some value to it to getting these things i also want to say in terms of reasonable consideration that we think all german town got reasonable consideration in this deal if in fact that's standard it had all of its liabilities of thirty four million dollars  among the sixty nine million of assets thirty eight million of that was down that fund i'm not saying those and down and sons had no value but number one there is no market for them you can't go out and sell your endowment fund for there is no fair market value that thirty eight million dollars was sort of a presence out of a long term income that came in every year there were restrictions on the use of that income they couldn't use the income to pay the but if you went out on the street and said to someone hey give me thirty eight million dollars and i'll give you this package of an down ment's that maybe over the next twenty years you're going to get thirty eight million dollars willing buyers not going to give you thirty eight million dollars for it million five hundred dollars for the land building equipment buildings equipment and intangibles if you look at this is all in our calculation which is on page five thirty eight of the joint appendix we think that appraisal it was done very close in time after after the transaction but very close in time is a little overstated in the sense that part of the calculation was an income determination and it understated the losses that old german town w under consideration