circuit law and as recognized by by this court two separate occasions equitable recoupment is is a judicial made doctrine really an exception so various priority schemes of the bankruptcy code with the court's indulgence i'd like the medical help racing presents to the hospital was severe cardiac problem the hospital consistent with its mission prides care to that medical patients and incurs significant debts incurred as a stent goes to payment gets intercepted and pays down the state under its tax or fee cooperate graham well that's got massive implications for a hospital trying to operate in the context of bankruptcy st and hospitals receiving less for that medical patient than otherwise provided and we know that under federal law that this quasi program quality assurance the program can't correlate saved and basically medicaid reimbursements so there can't be any correlation but effectively the hospitals are saving less because of this recoupment concept but it's sort of keep going forward in the sort of think about bankruptcy policy which is to allow this entity in this instance a health care provider to try to reorganize well now you've just taken revenue which could pay the doctors performing the procedure pay the trade vendor for providing the stent used to pay these patients but there's no revenue to pay those people is about intercepted by the state so the implications of a recoupment in a bankruptcy in a special unit in a health care bankruptcy are significant but the the test is whether there is a logical relationship why isn't there at least a logical relationship between the you call it fees going into  pot and the supplemental payments going out of the very same pot why isn't that a sufficient logical relationship to tag those two together under the recoupment doctrine the question you want to through are three reasons one is federal law dealing violation of the hold harmless issue i mean is that even before us the only question for us is whether this is sufficient logical relationship to trigger the recoupment doctrine do you have to take into account that they might independently violate something else by having done that well but if you sort of think about it your honor if something cannot correlate then how can it logically relate is that if federal law in the program was implemented says one stream has to be over here and one stream has to be over here once you're allowing recouping once that the logical relationship bounds are struck together you're inherently correlating the related and so logical relationship is is it it's an elastic test i understand from t l c and newbury but not without bounds and that ls to city must be measured just because of the hypothetical we just talked about right there apart from that you know the non correlation  subsection w what what argument do you have that they don't logically relate when they go in and out of the very same pot of money to two dollars distinctions to other one is the timing like such that the qualifier tax payment is due quarterly and is then paid in and then the supplemental payments don't come out till twelve to eighteen months later so that there's no direct correlation and there's no direct correlation for the nd point is the different formulas and that's again by federal law is you can't put a dollar in on a tax and expect a dollar back on a supplemental payment that's just the way the program works so if you sort of think about how to get the best answer i can give you prototypical example of equitable recruitment because you had estimated payments to medicare and then the subsequent audit and there was always that that netting that interim interconnection or internet linking between the cost years and the reports one depended upon its other with regard to the tax fee here against either the fee for service or the supplemental payment there's a line in the sand the why is it fair that you can not pay into the system and get something out let me explain that one is the at that the state can get a claim it's one of priority and it's it was sort of congressional mandate of the priorities of the bankruptcy code so it's that that's not fair is the state just like every general unsecured creditors can have a claim the question is can this they go to the head of the class and that's that the question for this pan the state usually goes to the head of the class one way or another doesn't it as the federal government yes your honor but you have a tension and that the tension is in a bankruptcy setting and the core is applying an equitable doctrine should the state allow itself to be put on head of the class to collect on related debts and i'd like to harp on it if you're if the court participating in the program it was not a priority created by congress congress could have could have simply said state health care taxes are entitled to priority so the the other way to look at it for the state whole with holds the supplemental from effectively from fee from service from the outset doesn't but outside of the context of the bankruptcy court outside of the contours of bankruptcy they have the ability to deduct either stream right that's correct but then the question for this but the supplemental they deduct that st is where you're saying now i'm not saying ok i'm simply saying is what happened here is they deducted from both streams i know they did but generally speaking it comes out of the supplemental st i don't know i don't know that your honor that's so you're saying they're both the same and then you should have really exact and it's when congress wanted to create a priority for a state it put it in five of seven of title eleven this is not in five hundred and seven of title eleven affectively you creating that to take on it's almost like creating a super credit which which did the state then intercept whether it's the supplemental where the fee for service ahead of everybody else and you have to balance that against the rehabilitated nature of a chapter eleven dollars case and especially the health care provider is we know what happened in gordon's right we know what happened the record is clear below that ultimately the hospital closed it is without the money and if it had this extra money in it goes back to that balance and but put the but another reason the supplemental is payments going out to the on the supplemental side so the private hospitals pay again but public hospitals receive money out of this supplemental care dischargeable it's tax is already different nature i know that but they're not dischargeable whether the destructive or not is irrelevant i understand that but philosophically that's kind of where you are well it's different different nature of claims ok i'm sorry i did i disrupted you know as i'm i'm arguing outside the law so go ahead understood your honor but if you sort of think about if it's a tax like structure and we don't know what it is it's hasn't been determined yet the supplemental came in a sort of a stream of income but then if you sort of think about recoupment recoupment requires two deaths of sort of the same nature so if you allow a recruitment of attacks like obligation on the one side against the non tax stream of income the osa then you've then you've crossed lines but it's the same nature part that i have trouble with because you know if i'm contributing to a pool of money that's going to be divided out and i'm going to get some share of it and i hadn't made my contribution yet it would be natural to think that you'd nets that out and i'm interested in sorting at and that's what the supplemental payments look like because if you follow the flow of the funds they're into the same pot in and out and we're just netting out the difference between what i was supposed to kick in and what i didn't that looks different from the fee for service and and where does it say that it has to be the same nature of payment before i can do that offsetting but maybe if the court will allow that one thing you said was we weren't making a contribution that was in your honour's question i disagree with that concept let me tell you why we are making a contribution it's just consistent with the priorities of the bankruptcy code so it's not that that provider who did not pay the good point it's it's paying in bankruptcy dollars  distinct and if it's the courts sort of then says in order to pay you have to pay in real dollars well then you're flouting the bankruptcy code with all due respect so this is something that i think you're making an argument that essentially benefit the other creditors in the bankruptcy court and and benefit this state the bankruptcy is a state that we've got to bankruptcy creditors priority say you're not fine the creditors priority should outweigh the state's interest here in fact they're doing a quite expansive reading of the logical relationship test which would diminish the value this state and it's just curious to me because i would think that the bankruptcy court would if if that was a correct principle would go that way we would have gone your way which is why we're here for your honest an overview which is i get it is every time i represent a creditor going into bankruptcy court the debtor sort of gets the nod because of the what you want to refer to the rehabilitative purpose of a bankruptcy court simply because the courts below i conflict between the circuits and how recruitment is addressed the nd circuit has a logical and doesn't apply logic relationship they apply the single transaction test so so we would caution this court to extend the bounds of logical relationship here because you're going beyond inherently what's until say there's one beyond newbury so so i don't understand your honour's hesitation and try to have deference to the bankruptcy court but but we went into the court to apply the president because the implications are significant the next health care case that's going to come along is what happens to that medical patient that comes into egypt for bankruptcy  debtor may ultimately go out of business sooner if we let the state immediately recruit this money absolutely right and that's now it's something that maybe it's a policy thing that the state should be thinking about or that that are all government well or or or the court could look at it as sort of shouldn't recouping some sorry should be viewed narrowly and that the policy should very large number of provisions that are incorporated in that cross reference isn't that right it was in like a specific provision that replicated this equalization was there there is there was actually a very specific provision in the provider telling the provider that you have to comply with the law you how to pay the fees in order to get the two dollars can you establish a logical relationship just by putting in the contract any other payment could you put in the contract that you know you have to pay your income tax in these other things and if you put that in the agreement then we have to treat them as logically related and put you to the front of the line let me st talk about the supplemental payments that is very clear the fees come in without a federal much matching dollars the monies redistributed in four different ways when the way to supplement the payments there's a lot of relationship feasting to come in for the payments to go out and the in order to receive the pavement benefits and cards also agree to have the withheld holdings by the department if if fail to pay the fees and that's due to this cross reference to entire chapters of the code yes and but you didn't answer my question if you put into the contract that you have to also agree that you have to pay your income tax all these other unrelated fees and that i get to deduct them out of your payments is that enough in your view to establish a logical relationship that would then put you to the front of the line and allow you to recoup i believe that i will create a lot of relationship for the request holdings by the department to be a valid in your view logical relationship is dictated by whatever the state puts in its contract and not by the flows of money or over the actual relationship of the transaction there's a logical relationship  require guidance to pay the fees in order to receive that benefits medical help but payment benefits and also specifically agree that you have to pay the fees if you don't pay the fees the department could withhold any medical payments to recover the fees that were not paid and we think our to the priority to the equity issue garden's is not entitled to this money says that they can't be correlated it's something that we have to take into account and looking at the logical relationship that the relationship you're positing might violate that provision no is the whole harmless for vision home homeless provision is this you pay me why and i we fund the same amount of money back to you there is no such situation here the fees are different from the supplemental payment stock gardens would have received if you pay the fees that the calculations are different the fees are calculated differently st of the supplemental payments but if it says in the hold harmless in listing what you can't do it says it can't be that all or any portion of the payment made under this subject or to the taxpayer very based only upon the amount of the total tax paid how is it that the case here because the amount you pay them under the subchapter doesn't fact vary by how much tax they paid because you're taking out the fact they didn't pay it well the whole harmless provision was that  payments made the payments in return are supposing meant to be a refund back to that pay eat the quality assurance supplement the payments are not meant to be a refund about to the hospital that pays the fee that is a distinction that is why the home harmless provision does not apply here that was not and that other supplemental payments and so your view is that this is an issue for in the federal department if it wants to come after you if you think you're violating this that it's not our concern we just look at the logical relationship and you take whatever risk if if they think you're violating this and position of the quality insurance fees so based upon that i do not believe that they will be any problems between the department and the federal government and c m s approved quality assurance fees back in two thousand and nine so it has been almost ten years since the imposition of the quality assurance fees other than the promise to to reimburse through the incorporation tell us why there a logical relationship between the fees for service and the missing cross the fee for service i go back to my earlier statement that the hospital needs to pay the fees in order to receive medicare payments that was a condition in the medical provider agreement but you put my question to was other than that other dish and what do you have that redistribute it in four different ways aside from supplemental payments another stream of payments out it's to cover the health care coverage of low income children who are on medica with respect to equity gardens focus a lot on equity and gardens focus on that house issue i have dealt with this issue for many years now and it is the department's position that the  suspect of of whether there's a provider agreement so those are the pros the there is no linkage between having a provider agreement and paying each coffees there are two different animals and each payments are provided to providers who may not have medical payments the linkage of logical relations can you just put something in a contract and inherently have a logical relationship we would submit that what parties do in a contract is just at the superficial level the goal of a court is to actually understand the logical relationship irrespective of what's in the contract appreciate your honor's time all right thank you council gardens regional hospital medical center versus state of california