Court Opinion

ID: 5130410
Source: CourtListenerOpinion
Date Created: 2021-12-01 14:02:11.501912+00
Date Added: 2024-06-11T08:23:17.500374
License: Public Domain

In the United States Court of Federal Claims
                                     No. 18-1731C
                              (Filed: November 30, 2021)

                                           )
 BARBARA D. RICHARDSON, in her             )
 capacity as Receiver of Nevada Health     )
 Co-Op.,                                   )
                                           )
                     Plaintiff,            )
                                           )
          v.                               )
                                           )
 THE UNITED STATES,                        )
                                           )
                     Defendant.            )
                                           )

Mark E. Ferrario, Greenberg Traurig, LLP, Las Vegas, NV, for Plaintiff. With him on the
briefs were Eric W. Swanis, Donald L. Prunty, and Tami D. Cowden. Of counsel were
Michael J. Schaengold, Daniel D. Straus, and Melissa P. Prusock, Greenberg Traurig, LLP,
Washington, D.C.

Phillip M. Seligman, Commercial Litigation Branch, Civil Division, United States
Department of Justice, Washington, D.C., for Defendant. With him on the briefs were
Ruth H. Harvey, Director, Kirk T. Manhardt, Deputy Director, and Frances M. McLaughlin,
Commercial Litigation Branch, Civil Division, United States Department of Justice,
Washington, D.C.

                                  OPINION AND ORDER

SOLOMSON, Judge.

I.    INTRODUCTION

       Plaintiff, Barbara D. Richardson, the Nevada Commissioner of Insurance, acting
in her position as the receiver (the “Receiver”) for the Nevada Health CO-OP (“NHC”),
sued Defendant, the United States, for payments it allegedly owes pursuant to the
Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010)
(codified as amended in scattered sections of Titles 26 and 42 of the United States Code)
(the “ACA”). Specifically, the Receiver alleges that the government has improperly
withheld such payments — totaling (approximately) at least $38 million and perhaps
exceeding $55 million — based on administrative offsets1 asserted by the Centers for
Medicare and Medicaid Services (“CMS”), an agency of the U.S. Department of Health
and Human Services (“HHS”), for amounts it contends NHC owes the government
pursuant to contract. Because the Court holds that the contract at issue precludes the
government’s offsets, the Receiver is entitled to judgment on its claims.

II.      PROCEDURAL HISTORY

        On November 8, 2018, the Receiver filed suit in this Court to recover amounts
due to NHC pursuant to the ACA, including sums that the government asserted as an
offset against what was due to NHC. ECF No. 1 (“Compl.”).2 On March 7, 2019, the
government filed a motion to dismiss pursuant to Rule 12(b)(6) of the Rules of the
United States Court of Federal Claims (the “RCFC”) for failure to state a claim upon
which relief can be granted. ECF No. 11 (“Def. MTD”). On July 31, 2019, the Receiver
filed a response in opposition to the government’s motion to dismiss and a cross-motion
for partial summary judgment. ECF No. 20. On August 12, 2019, this Court granted the
government’s motion to stay this case pending the United States Supreme Court’s
resolution of several other cases seeking payment pursuant to various alleged
money-mandating provisions of the ACA. ECF No. 21. On February 5, 2020, this case
was reassigned to the undersigned Judge. ECF Nos. 22, 23.

       On April 27, 2020, the Supreme Court issued its decision in Maine Community
Health Options v. United States, 590 U.S. --, 140 S. Ct. 1308 (2020). The Supreme Court
held that insurers seeking amounts owed under the ACA’s Risk Corridors program,
discussed infra, “have a right to payment under § 1342 [of the ACA] and a damages
remedy for the unpaid amounts.” Id. at 1315 (concluding “that § 1342 of the [ACA]
established a money-mandating obligation, that Congress did not repeal this obligation,
and that petitioners may sue the Government for damages in the Court of Federal
Claims”).

1   The terms “offset” and “setoff” are synonymous and are used interchangeably in this Opinion.
2Prior to commencing this matter, the Receiver filed suit in the United States District Court for
the District of Nevada, seeking a declaratory judgment that the government was not “legally
entitled to assert setoffs . . . for monies claimed against NHC through funds that HHS/CMS is
statutorily obligated to pay to NHC.” Complaint & Demand for Jury Trial ¶ 6, Richardson v.
U.S. Dep’t of Health & Hum. Servs., 2018 WL 1569772 (D. Nev. 2018) (No. 17-775). On March 30,
2018, the district court dismissed the Receiver’s complaint for lack of subject matter jurisdiction.
Richardson, 2018 WL 1569772, at *2. The district court held that the Receiver’s complaint
“ultimately seeks monetary relief,” and, accordingly, the United States Court of Federal Claims
possesses exclusive jurisdiction to hear the Receiver’s claims. Id.

                                                 2
      Because of the need to supplement the briefing before this Court to address
Maine Community Health, and based upon the parties’ agreement, the Court ordered the
Receiver to file an updated response in opposition to the government’s motion to
dismiss to include a new cross-motion for partial summary judgment. ECF No. 29. The
Receiver filed that brief on September 9, 2020. ECF No. 32 (“Pl. Resp.”). The
government filed a reply brief on October 26, 2020. ECF No. 34 (“Def. Rep.”). The
Receiver filed its reply on November 13, 2020. ECF No. 36 (“Pl. Rep.”).

       On May 19, 2021, the Receiver filed a Notice of Supplemental Authority
concerning the decision of our appellate court, the United States Court of Appeals for
the Federal Circuit, in Conway v. United States, 997 F.3d 1198 (Fed. Cir. 2021). ECF No.
42. The government filed its response on May 21, 2021. ECF No. 44 (“Def. Resp. to
Supp. Auth.”). On May 24, 2021, the Court held oral argument on the parties’ pending
motions. ECF No. 46 (“Tr.”).3

III.   LEGAL AND FACTUAL BACKGROUND4

       A. The ACA and Its Programs

       In March 2010, Congress enacted the ACA, “a series a series of interlocking
reforms designed to expand coverage in the individual health insurance market.”
King v. Burwell, 576 U.S. 473, 478–79 (2015). A key section of the ACA mandated the
creation of virtual health insurance markets, called “Health Benefit Exchanges” in each
state. 42 U.S.C. § 18031(b)(1). The ACA required that plans offered through such
exchanges satisfy certain criteria, including offering a minimum level of “essential”
coverage; these plans are referred to as “qualified health plans” (“QHPs”). Id. §§ 18021,
18022, 18031.

       At the outset, insurance carriers offering QHPs faced heightened risk because
they lacked “reliable data to estimate the cost of providing care for the expanded pool
of individuals seeking coverage” on the new Exchanges. Maine Cmty. Health Options,
140 S. Ct. at 1316 (quoting Moda Health Plan, Inc. v. United States, 892 F.3d 1311, 1314
(Fed. Cir. 2018)). To encourage insurers to enter the Exchanges, the ACA established

3Citations to the transcript of oral argument proceedings conducted on May 24, 2021 are
denoted by “Tr. __,” with page and line numbers indicated.
4As explained in more detail below, the material facts are not in dispute and, as summarized
herein, are drawn from documents attached as appendices to the Receiver’s complaint and the
parties’ briefs. Because those various appendices contain overlapping documents that are
generally redundant of each other, the Court primarily relies upon those included in the
corrected appendix to the Receiver’s response brief, as it appears to represent the most
comprehensive collection of such documents. See ECF Nos. 37-1 to 37-5. Citations to those
documents are denoted as “A__,” with the page number of the appendix indicated.

                                              3
several programs to defray the financial burden on insurers and to mitigate their risks.
See id. at 1315. Among these initiatives were three premium stabilization programs,
dubbed the “3Rs”: (1) risk corridors; (2) risk adjustment; and (3) reinsurance. See
Conway, 997 F.3d at 1202 (citing 42 U.S.C. §§ 18061–63).

        The risk corridor program was a temporary program for the exchanges’ first
three years, 2014 to 2016, pursuant to which amounts collected from profitable
insurance plans effectively funded payments to unprofitable plans. 42 U.S.C. § 18062;
see also Maine Cmty. Health Options, 140 S. Ct. at 1316 (Section “1342 stated that the
eligible profitable plans ‘shall pay’ the Secretary of the Department of Health and
Human Services (HHS), while the Secretary ‘shall pay’ the eligible unprofitable plans”)
(quoting 42 U.S.C. § 18062)). The risk adjustment program, in contrast, is a permanent
program under which amounts collected from insurers with healthier-than-average
enrollees are used to fund payments to insurers with sicker-than-average enrollees.
42 U.S.C. § 18063. Finally, the reinsurance program was a temporary program that
“required insurers to pay premiums into a pool that compensated carriers covering
‘high risk individuals.’” Maine Cmty. Health Options, 140 S. Ct. at 1316 n.1 (quoting
42 U.S.C. § 18061).5

       The “Cost Sharing Reduction” program permits the government to subsidize
premium costs for lower income participants. 42 U.S.C. § 18071. Under this program,
insurers offering QHPs are required to reduce eligible individuals’ costs by specified
amounts based on household income, id. § 18071(a)–(c), and HHS is required to
reimburse the insurers for those costs, id. § 18071(c)(3)(A). The government issues
periodic subsidy payments to the insurers, id. §§ 18071(c)(3)(a), 18082(c)(3), with a
yearly reconciliation for payments that are too high or too low, 45 C.F.R. § 156.430.

       To “foster the creation of qualified nonprofit health insurance issuers to offer
qualified health plans in the individual and small group markets,” the ACA established
the “Consumer Operated and Oriented Plan” (“CO-OP”) program. 42 U.S.C.
§ 18042(a)(2). The ACA authorized HHS to lend money to prospective health insurers
seeking to qualify as CO-OPs offering QHPs. Id. § 18042(b)(1). As discussed in more
detail below, the ACA required HHS to promulgate regulations governing the issuance
of loans, as well as their repayment “in a manner consistent with State solvency
regulations and other similar State laws that may apply.” Id. § 18042(b)(3).

5The ACA contemplated states administering their own reinsurance and risk adjustment
programs, with HHS responsible for operating the programs in states that did not elect to
administer the programs. 42 U.S.C. § 18041(b)–(c). In Nevada, HHS operated the reinsurance
and risk adjustment programs. Compl. ¶ 26 (citing 45 C.F.R. § 153.310); Def. MTD at 6.

                                             4
         B. NHC’s Participation in the CO-OP Program

             1. The Government’s Loans to NHC

       NHC’s predecessor in interest, Hospitality Health, Ltd., was a Nevada health
maintenance organization that participated in the CO-OP program. Pl. Resp. at 6–7;
A151 (Loan Agreement, Section 1.1). On May 17, 2012, Hospitality Health, Ltd. and
CMS executed a loan agreement (the “Loan Agreement”) that included two promissory
notes: (1) a start-up loan of $17,105,047 (the “Start-Up Loan”); and (2) a solvency loan of
$48,820,349 (the “Solvency Loan”). Compl. ¶ 56; Pl. Resp. at 7; A157 (Loan Agreement,
Section 3.2). Collectively, the Loan Agreement defined the term “Loans” to “mean[]
both of them together” — i.e., both the Start-up Loan and the Solvency Loan. A154
(Loan Agreement, Section 2.1).6 These Loans subsequently were assigned to NHC,
A226–28 (Amendment to Loan Agreement), and were intended to facilitate NHC’s
offering “health plans primarily in the individual and small group markets.” Pl. Resp.
at 7; A157 (Loan Agreement, Section 3.1).

         The Loan Agreement addresses, inter alia, NHC’s repayment obligations:

                4.4    Repayment of the Start-Up Loan. . . . Principal
                repayments on the Start-Up Loan will be . . . subject to
                [NHC]’s ability to meet State Reserve Requirements and other
                solvency regulations or requisite surplus note arrangements.
                Unless [CMS] terminates this Agreement for cause under
                Section 16.3 below, [NHC] shall be obligated to repay 100% of
                the Start-Up Loan amount disbursed, plus any capitalized
                Interest to [CMS] . . . subject to its ability to meet State Reserve
                Requirements and other solvency regulations, or requisite
                surplus note arrangements.             If [CMS] terminates this
                Agreement for cause under Section 16.3 below, [NHC] shall
                be obligated to repay 110% of the Start-Up Loan Principal
                disbursed, plus any capitalized Interest . . . .

A161 (Loan Agreement, Section 4.4); see also A164 (Loan Agreement, Section 5.6)
(containing a similar repayment provision for the Solvency Loan, also “subject to
[NHC]’s ability to meet State Reserve Requirements and other solvency regulations, or
requisite surplus note arrangements”).

6   This Opinion uses the term “Loans” as defined in the Loan Agreement.

                                                 5
       In the event of NHC’s default, the Loan Agreement provides as follows:

              3.4.    Security for the Loans.       The Loans and other
              Obligations will be general obligations of [NHC]. Because of
              the intent of the Loans, and the Solvency Loan in particular,
              is to provide financing to [NHC] that meets the definition of
              “risk based capital” for State Insurance Law purposes, the
              Loans will have a claim on cash flow and reserves of [NHC]
              that is subordinate to (a) claims payments, (b) Basic Operating
              Expenses, and (c) maintenance of required reserve funds
              while [NHC] is operating as a CO-OP under State Insurance
              Laws.

A157 (Loan Agreement, Section 3.4).

       The Loan Agreement also addresses CMS’s remedies in the event of NHC’s
default:

              19.12. Right of Set-Off.         Notwithstanding any other
              provisions of this Agreement to the contrary, in the event any
              Event of Default is not cured or another accommodation
              permissible under this Agreement is not otherwise reached
              within applicable notice and cure periods, [CMS] shall have
              at its disposal the full range of available rights, remedies and
              techniques to collect delinquent debts, such as those found in
              the Federal Claims Collection Standards and applicable
              Treasury regulations, as appropriate, including demand
              letters, administrative offset, salary offset, tax refund offset,
              private collection agencies, cross-servicing by the Treasury,
              and litigation.

A188 (Loan Agreement, Section 19.12).

       In early 2013, the Loan Agreement was amended to “acknowledge the
promissory note contained in Appendix 4 of the Agreement as a surplus note within the
meaning of the Statement of Statutory Accounting Principles (SSAP) No. 41 and thus
accept the proceeds of the Solvency Loan provided through the Agreement as an asset
for regulatory purposes, consistent with the original intent of the parties.” A229–30 (Second
Amendment to Loan Agreement) (emphasis added).

                                             6
          2. NHC’s Receivership and the Subsequent Claims Process

       In 2015, NHC experienced significant financial distress, with the Nevada
Division of Insurance (“NDOI”) declaring NHC “unsound,” pursuant to section
696B.210(2) of the Nevada Revised Statutes. A335 (Pet. for Appointment of
Commissioner as Receiver). On August 21, 2015, NDOI suspended NHC’s Certificate of
Authority and ordered NHC to cease operating as a Nevada insurer. A367 (Order of
Voluntary Suspension of Certificate of Authority). On September 25, 2015, the then-
acting Nevada Commissioner of Insurance filed a petition in the Eighth Judicial District
Court of the State of Nevada (the “Receivership Court”), requesting appointment as
receiver of NHC, for issuance of a temporary injunction, and for other related relief.
A329–39 (Pet. for Appointment of Commissioner as Receiver). On October 1, 2015, the
Receivership Court appointed a temporary receiver for NHC. A375–77. On October 14,
2015, the Receivership Court issued a permanent injunction and order appointing the
Acting Commissioner of Insurance as the Receiver of NHC, and Cantilo & Bennett, LLP
as the Special Deputy Receiver. A379–91 (the “Receivership Order”).

      The Receivership Order also provided, in relevant part, as follows:

             (5)    All persons, corporations, partnerships, and all other
                    entities wherever located, are hereby enjoined and
                    restrained from interfering in any manner with the
                    Receiver’s possession of the Property or her title to or
                    right therein and from interfering in any manner with
                    the conduct of the receivership of CO-OP. Said persons,
                    corporations, partnerships, associations and all other
                    entities are hereby enjoined and restrained from
                    wasting, transferring, selling, disbursing, disposing of,
                    or assigning the Property and from attempting to do so
                    except as provide herein.
             ....

             (8)    All claims against CO-OP[,] its assets[,] or the Property must
                    be submitted to the Receiver as specified herein to the exclusion
                    of any other method of submitting or adjudicating such
                    claims in any forum, court, or tribunal subject to the further
                    Order of this Court. The Receiver is hereby authorized to
                    establish a Receivership Claims and Appeal Procedure,
                    for all receivership claims. The Receivership Claims and
                    Appeal Procedures shall be used to facilitate the orderly
                    disposition or resolution of claims or controversies
                    involving the receivership or the receivership estate.

                                                7
....

(10) All secured creditors or parties, pledge holders, lien
     holders, collateral holders or other persons claiming
     secured, priority or preferred interest in any property or
     assets of CO-OP, including any governmental entity, are
     hereby enjoined from taking any steps whatsoever to
     transfer, sell, encumber, attach, dispose of or exercise
     purported rights in or against the Property.
(11) The officers, directors, trustees, partners, affiliates,
     brokers, agents, creditors, insureds, employees,
     members, and enrollees of CO-OP, and all other persons
     or entities of any nature including, but not limited to,
     claimants, plaintiffs, petitioners, and any governmental
     agencies who have claims of any nature against CO-OP,
     including cross-claims, counterclaims and third party
     claims, are hereby permanently enjoined and restrained from
     doing or attempting to do any of the following, except in
     accordance with the express instructions of the Receiver
     or by Order of this Court:
       ....

       c. Making or executing any levy upon, selling,
          hypothecating, mortgaging, wasting, conveying,
          dissipating, or asserting control or dominion over the
          Property or the estate of CO-OP;
       d. Seeking or obtaining any preferences, judgments,
          foreclosures, attachments, levies, or liens of any kind
          against the Property;
       e. Interfering in any way with these proceedings or
          with the Receiver . . . in their acquisition of
          possession of, the exercise of dominion or control
          over, or their title to the Property, or in the discharge
          of their duties as Receiver thereof[.]
....

(19) No judgment, order, attachment, garnishment sale,
     assignment, transfer, hypothecation, lien, security
     interest or other legal process of any kind with respect to
     or affecting CO-OP or the Property shall be effective or
     enforceable or form the basis for a claim against CO-OP
     or the Property unless entered by the Court, or unless

                                 8
                    the Court has issued its specific order, upon good cause
                    shown and after due notice and hearing, permitting
                    same.

A382–89 (Receivership Order) (emphasis added).

        On December 23, 2015, CMS terminated the Loan Agreement, effective
December 31, 2015, pursuant to: (1) Section 15.1, as an “event of default” was triggered
when the Receivership Order was issued; (2) Section 15.3, due to the suspension of
NHC’s Certificate of Authority; and (3) Section 16.2, permitting the government to
terminate the Loan Agreement for “program viability” reasons. A393–94 (Letter from
Kevin J. Counihan, Chief Executive Officer, Health Insurance Marketplaces, CMS, to
Pam Egan, Chief Executive Officer, NHC (Dec. 23, 2015)); A422 (Def. Proof of Claim);
Compl. ¶ 111. On March 8, 2016, CMS notified NHC that it had placed an
“administrative hold” on payments due to NHC. Compl. ¶ 118; see also, e.g., A396–97,
A398, A399–400, A401, A402–03, A404–05, A406, A407, A408 (collectively, “Offset
Letters”). Thereafter, between August 2016 and December 2017, the government offset
payments due to NHC with amounts NHC allegedly owed the government pursuant to
the Start-Up Loan. See Offset Letters. The Commissioner did not authorize these
offsets. A4–5 (Decl. of Barbara D. Richardson); A14 (Decl. of Mark F. Bennett).7 The
Receivership Court also has not approved any offsets. See A427–28 (Notice of Claim
Determination).

       On September 21, 2016, a Nevada state court placed NHC in liquidation. A410–
12 (Final Order of Liquidation). On or about October 10, 2016, the Receivership Court
approved the Receivership Claims and Appeal Procedure, A414–17 (Final Order
Granting Other Relief), and set April 28, 2017 as the deadline for creditors to file claims,
A411 (Final Order of Liquidation). On April 28, 2017, the government filed a Proof of
Claim for repayment of the Start-Up and Solvency Loans, asserting that such claims
were “entitled to treatment as secured claims to the extent they are subject to set-off by
a claim of [NHC] against the United States.” A419–24 (Def. Proof of Claim).

       In June 2017, the Special Deputy Receiver, acting on behalf of the Receiver,
issued a Notice of Claim Determination (“NCD”) on the government’s claim, finding,
among other things, that: (1) pursuant to state law and the Loan Agreement, the
government’s claim was subordinate in priority to policyholder and administrative
expense claims; (2) NHC’s estate was not anticipated to be sufficient to satisfy even
claims that had a higher priority than the government’s claim; and (3) the government’s
claimed setoff would violate the Receivership Order. A426–29 (Notice of Claim
Determination). Accordingly, the Special Deputy Receiver denied the government’s

7Ms. Richardson and Mr. Bennett submitted declarations in their official capacity as
representatives of the Receiver and Special Deputy Receiver, respectively.

                                               9
claim. A427–28. The NCD included an explanation of the appeals process and advised
that “[i]f [the government] do[es] not appeal this NCD in accordance with the
provisions of the Receivership Appeal Procedure, the determination regarding priority
and other aspects of [the government’s] claim made herein will become final and
nonappealable.” A428. The government did not appeal the NCD. Pl. Resp. at 14; A17
(Decl. of Mark F. Bennett); Tr. 8:9–10.

       C. The Receiver’s Complaint

       The Receiver’s pending Complaint before this Court contains four principal
claims for an affirmative recovery. In particular, pursuant to applicable ACA statutory
and regulatory provisions, the Receiver claims that it is entitled to: (1) at least
$43,042,673.80 in risk corridor payments for 2014 and 2015, see Compl. ¶¶ 125–132
(Count I); (2) a reinsurance payment of at least $8,846,611.34, see Compl. ¶¶ 133–138
(Count II); (3) a net individual market risk adjustment payment of $5,244,157.68 for
2015, see Compl. ¶¶ 139–143 (Count III); and (4) financial assistance payments in the
amount of at least $3,178,944.60, see Compl. ¶¶ 144–150 (Count IV).

        Presumably anticipating the government’s assertion of an affirmative defense or
counterclaim in response to Counts I–IV — and based on the fact that the government
already has asserted its right to setoff “funds it owed to NHC to pay off amounts
allegedly owed by NHC to the Government under the Start-up Loan,” Compl. ¶ 157 —
the Receiver further claims, in Count V, that the government’s assertion of a setoff is
illegal and breached the Loan Agreement, id. ¶¶ 157–158. See Compl. ¶¶ 151–169
(Count V). In particular, the Receiver asserts that “[r]epayment of the Start-Up Loan
and the Solvency Loan were both contractually subordinated by the Government to the
payment of other creditor claims of NHC.” Compl. ¶ 152.

        Finally, the Receiver asserts, under an illegal exaction theory, see Compl. ¶¶ 170–
173 (Count VI), that the “Government unilaterally and improperly offset sums against
NHC’s Risk Corridors, Reinsurance, Risk Adjustment, and Financial Assistance
balances of $55,757,236.41, which the Government owed to NHC.” Compl. ¶ 171. Any
setoffs, in the Receiver’s view, “violate federal law, Nevada State law, the Loan
Agreement, and the Nevada Permanent Receivership Order.” Compl. ¶ 172.

IV.    JURISDICTION

       Pursuant to the Tucker Act, the United States Court of Federal Claims has
jurisdiction “to render judgment upon any claim against the United States founded
either upon the Constitution, or any Act of Congress . . . or for liquidated or
unliquidated damages in cases not sounding in tort.” 28 U.S.C. § 1491(a)(1). Because
the Tucker Act “does not create any substantive right enforceable against the United
States for money damages,” the Court must inquire whether the statute at issue “can

                                            10
fairly be interpreted as mandating compensation by the Federal Government for the
damage sustained.” United States v. Testan, 424 U.S. 392, 398, 400 (1976) (quoting
Eastport S. S. Corp. v. United States, 372 F.2d 1002, 1009 (Ct. Cl. 1967)); see also United
States v. Navajo Nation, 556 U.S. 287, 290 (2009).

        Here, the Receiver’s claims are based on the ACA, which is a money-mandating
source of substantive law. Maine Cmty. Health Options, 140 S. Ct. at 1329 (holding that
42 U.S.C. § 18062 “falls comfortably within the class of money[-]mandating statutes that
permit recovery of money damages in the Court of Federal Claims”); Sanford Health
Plan v. United States, 969 F.3d 1370, 1372–73 (Fed. Cir. 2020) (opining that 42 U.S.C.
§ 18071 “imposes an unambiguous obligation on the government to pay money” and
“th[is] obligation is enforceable through a damages action in the Court of Federal
Claims under the Tucker Act”). The government does not dispute the Court’s
jurisdiction to decide the Receiver’s claims and, indeed, previously argued that this case
should be brought in this Court, pursuant to the Tucker Act (and not in the district
court).8 Consistent with the Supreme Court’s decision in Maine Community Health, 140
S. Ct. at 1329, and the Federal Circuit in Conway, 997 F.3d at 1198, this Court finds that it
has jurisdiction to decide this case.

V.        STANDARDS OF REVIEW

        In deciding a motion to dismiss for failure to state a claim under RCFC 12(b)(6),
the Court views the facts in the light most favorable to the plaintiff and accepts as true
all factual allegations — but not conclusory legal assertions — contained in the
complaint. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); see also Am. Bankers
Ass’n v. United States, 932 F.3d 1375, 1380 (Fed. Cir. 2019). Those facts must yield a
“reasonable inference that the defendant is liable for the misconduct alleged.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A plaintiff may not simply plead “labels and
conclusions” or “a formulaic recitation of the elements of a cause of action.” Twombly,
550 U.S. at 555 (citations omitted). The Court must dismiss a complaint “when the facts
asserted by the claimant do not entitle him to a legal remedy.” Lindsay v. United States,
295 F.3d 1252, 1257 (Fed. Cir. 2002).

       Summary judgment is appropriate when there is no genuine issue of material
fact and the moving party is entitled to judgment as a matter of law. RCFC 56(a);
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A genuine dispute is one that could
permit a court to find in the non-moving party’s favor, and a material fact is one that
could affect the outcome of the suit. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). “A summary judgment motion is properly granted against a party who fails to
make a showing sufficient to establish the existence of an essential element to that

8   See supra note 2.

                                              11
party’s case and for which that party bears the burden of proof at trial.” Univ. of S.
Fla. v. United States, 146 Fed. Cl. 274, 280 (2019) (citing Celotex, 477 U.S. at 324).

        In this case, “the issue at the core of the dispute has been treated as purely legal”
and “there has been no serious contention that the facts are contested.” Easter v. United
States, 575 F.3d 1332, 1336 (Fed. Cir. 2009). Because “this case involves essentially
undisputed facts and turns on the legal consequences that attach to those facts . . . ,
nothing of significance turns on the distinction between a ruling on the pleadings and
summary judgment.” Id.

VI.    DISCUSSION

       This case boils down to whether the government’s offsets against amounts owed
to the Receiver are proper. For the reasons explained below, the Court concludes that
the Receiver is entitled to judgment because the government’s offsets were (and remain)
improper pursuant to (1) the Loan Agreement, and (2) the results of Nevada’s
liquidation process.

       A. The Receiver is Entitled to Summary Judgment on Count I

        Although the government originally moved to dismiss Count I of the Receiver’s
Complaint on the ground that it was inconsistent with binding decisions of the Federal
Circuit, see Def. MTD at 14, the Supreme Court effectively ended that argument in the
Receiver’s favor. See Maine Cmty. Health Options, 140 S. Ct. at 1323, 1331. The
government agrees, conceding that “[a]s to Count I, the Supreme Court has resolved the
liability of the United States under the risk corridors program of the ACA.” Def. Rep. at
2 (admitting that “NHC is due risk corridors payments for benefit years 2014 and 2015,”
but asserting that “the amount owed is in dispute”).

     Accordingly, the Court DENIES the government’s motion to dismiss Count I
and GRANTS the Receiver’s motion for summary judgment on Count I as to liability.

       B. The Receiver is Entitled to Summary Judgment on Counts II–V Because the
          Government’s Offsets Are Improper

        The parties agree that the sole remaining question for the Court is whether the
government’s claimed offsets are proper as a matter of law. See Def. MTD at 1 (“The
sole dispute presented in Counts II–VI concerns the propriety of [CMS]’s exercise of
offset.”); Pl. Resp. at 14. If the government is correct that the offsets are proper, then the
remaining counts in the Complaint fail as a matter of law “because the amounts sought
have been paid” via the offsets. Def. MTD at 15. In contrast, if the Receiver is correct,
then it is entitled to judgment as a matter of law because the government concurs that

                                             12
“there is no dispute regarding the amounts at issue[.]” Id.9 Because the Court holds
that the government’s asserted offsets are (a) improper under the Loan Agreement, and
(b) inconsistent with the Nevada state liquidation proceedings, the Court DENIES the
government’s motion to dismiss, and GRANTS the Receiver’s motion for summary
judgment with respect to Counts II–V.10 Thus, even assuming that the government has
the better interpretation of a Nevada statute generally permitting the assertion of offsets
during the liquidation process, the government cannot invoke that statute to justify the
administrative offsets at issue.

        Before turning to the specifics of this case, the Court pauses to highlight that the
Federal Circuit’s decision in Conway — while not entirely dispositive of the outcome in
this case — greatly illuminates the way forward. In Conway, the government, facing
suit from an insolvent Colorado CO-OP, “attempted to leapfrog other insolvency
creditors through offset, rather than paying its debt in full and making a claim against
[the CO-OP’s] estate as an insolvency creditor.” 997 F.3d at 1201. Judge Hertling, of
this Court, rejected the government’s various offset theories, and the Federal Circuit
affirmed. Conway v. United States, 145 Fed. Cl. 514, 522–29 (2019), aff’d, 997 F.3d 1198. In
brief, the Federal Circuit concluded: (1) that the government could not offset a CO-OP’s
“statutory obligations” — as opposed to its “contractual obligations” — pursuant to
Colorado state law (i.e., either statutory or common law), Conway, 997 F.3d at 1204–06;
(2) HHS specifically “preserved state insolvency law for repayment of CO-OP program
loans,” id. at 1212 (noting that “[b]y requiring consistency with state priority law,
Congress preserved state creditor priority statutes”); (3) “the federal scheme does not
preempt Colorado’s creditor priority framework,” id. at 1214; and (4) federal common
law does not “override” a state’s “liquidation priority scheme,” id. at 1215.

        Accordingly, the Court agrees with the government that, following Conway, this
case’s complexities reduce to this question: whether the government’s offset was
“specifically authorized by contract and Nevada state law.” Def. Resp. to Supp. Auth.
at 2 (arguing that Conway “does not address Nevada law or HHS’s contractual offset
rights here” and that “Nevada law establishes a right to offset here that precedes, and is
separate from, a liquidation priority”). For the reasons explained below, the Court
answers that question in the negative and holds that the government must pay the
Receiver the total sum to which it is entitled without applying any offset. In particular,
the Court holds that the government’s offsets are precluded by: (1) the parties’ Loan
Agreement; and (2) Nevada state law as implemented via the state receivership and

9Because resolving the offset issue is purely a question of law — and there is no dispute of
material fact — the Court agrees with the Receiver that “addressing the propriety of the offset
under both standards [of review] would be redundant.” Pl. Resp. at 16.
10The Receiver agrees that “Counts V and VI present alternate legal theories for the recovery of
the same amounts sought in Counts II–IV” and acknowledges that “NHC does not request a
duplicative recovery” via those two counts. Pl. Resp. at 2 n.2.

                                               13
liquidation proceedings, in which the government participated. Accordingly, even
though the government likely is correct that Nevada state law generally permits the
assertion of an offset under some circumstances — i.e., that an offset pursuant to section
696B.440 of the Nevada Revised Statutes (“the Nevada Offset Statute”) is not inherently
inconsistent with the state’s statutory creditor priority scheme — the government’s
offsets at issue are nevertheless improper, given the facts of this case.

          1. The Loan Agreements — Statutory and Regulatory Framework

        Because the parties agree — as does the Court — that the terms of the Loan
Agreement govern the outcome of this dispute, the Court begins there. In that regard,
the Court recognizes that the Loan Agreement must be construed against the backdrop
of the statute authorizing it, along with related implementing regulations. City of
Fulton v. United States, 680 F.2d 115, 120 (Ct. Cl. 1982) (“The rule that contract terms will
be given their ordinary meaning is particularly appropriate where the contract
language is easily construed in harmony with the governing statute or regulation.”);
Roedler v. Dep’t of Energy, 255 F.3d 1347, 1352 (Fed. Cir. 2001) (“when, as here, the
contract implements a statutory enactment, it is appropriate to inquire into the
governing statute and its purpose”); Ohio v. United States, 154 Fed. Cl. 233, 237 (2021)
(“where a contract fulfills or implements a statutory requirement, the underlying statute
must guide the court’s interpretation of the contract”); Pucciariello v. United States, 116
Fed. Cl. 390, 413 (2014) (rejecting contract interpretation that would conflict with
statute); Batavia Times Pub. Co. v. United States, 96 Ct. Cl. 166, 171 (1942) (Jones, J.,
concurring) (construing statutes “[t]o get a true concept of the background of th[e]
contract” at issue).11 Accordingly, and before turning to the specific provisions of the
Loan Agreement and the parties’ arguments, the Court summarizes in greater detail the
relevant statutory and regulatory framework on which the Loan Agreement is based.

              a. The CO-OP Statute

       Section 18042 of Title 42 of the United States Code (the “CO-OP Statute”)
authorizes HHS to “establish a program to carry out the purposes of this section to be
known as the [CO-OP] program.” 42 U.S.C. § 18042(a)(1). That statute further requires
that HHS “shall provide through the CO-OP program” two categories of financial
assistance to qualified CO-OPs: “(A) loans to provide assistance . . . in meeting its
start-up costs; and (B) grants to provide assistance . . . in meeting any solvency
requirements of States in which the [CO-OP] seeks to be licensed to issue qualified

11The Court does not conclude that the authorizing statute and its implementing regulations are
somehow incorporated into the Loan Agreement to create terms that are not there, see Silver
State Land LLC v. United States, 148 Fed. Cl. 217, 239–43 (2020), but rather only that such
background is helpful to understanding the contractual language the parties employed in their
agreement at issue.

                                              14
health plans.” Id. § 18042(b)(1) (emphasis added). To “receiv[e] a loan or grant under
the CO-OP,” a recipient had to enter a contract with the HHS. Id. § 18042(b)(2)(C)(i).

        The CO-OP Statute expressly distinguishes between the defined loans and grants
only in terms of their respective repayment timelines:

              Not later than July 1, 2013, and prior to awarding loans and
              grants under the CO-OP program, the Secretary shall
              promulgate regulations with respect to the repayment of such
              loans and grants in a manner that is consistent with State solvency
              regulations and other similar State laws that may apply. In
              promulgating such regulations, the Secretary shall provide
              that such loans shall be repaid within 5 years and such grants
              shall be repaid within 15 years . . . .

42 U.S.C. § 18042(b)(3) (“Repayment of loans and grants”) (emphasis added).

        Congress further required HHS to “tak[e] into consideration any appropriate State
reserve requirements, solvency regulations, and requisite surplus note arrangements that must
be constructed in a State to provide for such repayment prior to awarding such loans and
grants.” Id. (emphasis added). Again, the CO-OP Statute does not distinguish between
the prescribed loans and grants except as to the payment timelines. Thus, the other
mandatory considerations — i.e., regarding state solvency regulations, reserve
requirements, and surplus notes — apply with equal force to both Loans.

              b. The CO-OP Regulations

       To implement the CO-OP program as Congress instructed in the CO-OP Statute,
HHS proposed a set of regulations. See Patient Protection and Affordable Care Act;
Establishment of Consumer Operated and Oriented Plan (CO-OP) Program, 76 Fed.
Reg. 43,237 (proposed July 20, 2011) (to be codified at 45 C.F.R. pt. 156) (“Proposed
Rule”). After receiving comments on the Proposed Rule, HHS issued a final rule,
codified at 45 C.F.R. Part 156. See Patient Protection and Affordable Care Act;
Establishment of Consumer Operated and Oriented Plan (CO-OP) Program, 76 Fed.
Reg. 77,392 (Dec. 13, 2011) (“Final Rule”).

      Notwithstanding the CO-OP Statute’s distinction in nomenclature between loans
and grants, the Final Rule refers only to loans. See 45 C.F.R. § 156.500 (“Under this
program, loans are awarded to encourage the development of CO-OPs. Applicants . . .
may apply to receive loans to help fund start-up costs and meet the solvency

                                              15
requirements of States in which the applicant seeks to be licensed . . . .”).12 HHS’s
commentary accompanying the Final Rule explains why the regulation refers only to
loans (and not grants): “[a]lthough the statute refers to Solvency Loans as ‘grants,’ they
are loans because they must be repaid.” Final Rule, 76 Fed. Reg. at 77,394. In the Final
Rule, “Start-up Loan” is defined as “a loan provided by CMS to a loan recipient for
costs associated with establishing a CO-OP” while “Solvency Loan” refers to “a loan
provided by CMS to a loan recipient in order to meet State solvency and reserve
requirements.” 45 C.F.R. § 156.505.

      With respect to the Solvency Loan in particular, the implementing regulation
provides:

               Solvency Loans awarded under this section will 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.

Id. § 156.520(a)(2). That precise language does not expressly apply to the Start-Up Loan
component; but, with respect to both Loans, the regulation does similarly provide that
“[t]he loan recipient must make loan payments . . . until the loan is paid in full
consistent with State reserve requirements, solvency regulations, and requisite surplus note
arrangements.” Id. § 156.520(b) (emphasis added); see also id. § 156.520(a)(1) (“[a]ll loans
awarded under this subpart must be used in a manner that is consistent with . . . the
loan agreement, and all other statutory, regulatory, or other requirements”).

           2. State Solvency Requirements and Surplus Notes

       In implementing the CO-OP Statute, HHS explained the state regulatory issue,
pertaining to solvency, as follows:

               Solvency and the financial health of insurance issuers is
               historically a State-regulated function. As a condition of
               licensure as a health insurance issuer, State insurance
               departments require that an issuer maintain an amount of
               capital that is consistent with its size and risk profile. This
               measure of reserve is called risk-based capital (RBC). A loan
               is considered a liability and typically would not assist an

 See also 45 C.F.R. § 156.520(a) (providing that “[a]pplicants may apply for the following loans
12

under this section: Start-up Loans and Solvency Loans”).

                                               16
               organization in meeting solvency requirements, since the
               liability would have to be subtracted from the calculation of
               reserves in order to determine the net protection afforded to
               enrollees.

Final Rule, 76 Fed. Reg. at 77,403.

       HHS thus addressed the concern that the Solvency Loans, in particular, “will be
treated by States as debt rather than capital that satisfies State solvency and reserve
requirements.” Final Rule, 76 Fed. Reg. at 77,403. HHS acknowledged that, pursuant to
the CO-OP Statute, “the standards for the repayment of loans awarded under the
CO-OP program must take into consideration ‘any appropriate State reserve
requirements, solvency regulations, and requisite surplus note arrangements that must
be constructed in a State.’” Id. (quoting 42 U.S.C. § 18042(b)(3)). To meet that statutory
requirement, “CMS proposed to structure Solvency Loans to each loan recipient in a
manner that meets State reserve and solvency requirements so that the loan recipient
can fund its required capital reserves.” Id.; see also 45 C.F.R. § 156.520(a)(2) (providing
Loans to be repaid “consistent with State reserve requirements, solvency regulations,
and requisite surplus note arrangements”). Although the government, as explained
below, now attempts to distinguish between the Solvency Loan and the Start-Up Loan
in terms of “State reserve and solvency requirements,” the interpretive difficulty, as
previously noted, is that the CO-OP Statute itself does not neatly differentiate between
the two types of loans (except with respect to repayment timelines).13

       This brings the Court to the topic of “surplus notes.” According to the National
Association of Insurance Commissioners (“NAIC”), insurers issue surplus notes (also
known as “surplus debentures and capital notes”) to raise capital; they “are unsecured
debt subordinated to all claims by policyholders and creditors, as such interest and
principal payments on the notes are made only after approval has been granted by the
commissioner of the state of domicile.”14 The advantage of a surplus note is that while
they “are debt instruments similar in some ways to issued corporate bonds offering a
coupon, i.e. interest rate of return, and having a maturity date, under statutory

13See Proposed Rule, 76 Fed. Reg. at 43,239 (“Repayment terms in the award of loans must take
into consideration any appropriate State reserve requirements, solvency regulations, and
requisite surplus note arrangements that must be constructed by a qualified health insurance
issuer in a State to receive and maintain licensure.” (emphasis added)); 45 C.F.R. § 156.520(b).
14Surplus Notes, NAIC, https://content.naic.org/cipr_topics/topic_surplus_notes.htm (June 24,
2020) [hereinafter NAIC Def’n of Surplus Note]. “The National Association of Insurance
Commissioners, the umbrella organization for insurance regulators in the United States, has set
out accounting standards for insurers, and all 50 states require insurance companies to adhere
to the NAIC standards.” Silva v. Aviva PLC, 2016 WL 1169441, at *2 (N.D. Cal. Mar. 25, 2016).

                                               17
accounting principles surplus notes are classified as equity.”15 The reason for that
special treatment “is because of the subordinate nature of the surplus notes and the
restrictions for payment that requires approval by the domiciliary state
commissioner.”16

       In sum, the key point is that “[s]tate insurance regulators treat surplus notes as
statutory capital because they are unsecured and are at the bottom level of insurers’
capital structure, which [are] subordinate to policyholders, claimant and beneficiary
claims, and to all other classes of creditors.”17 Accordingly, surplus notes are “part of
the insurer’s total adjusted capital under Risk-Based Capital calculations.”18

      In addressing the Proposed Rule, “some commenters” noted that “Solvency
Loans must be structured as surplus notes as they are the only types of loans that State
insurance regulators will recognize as assets rather than debt[,]” while another
respondent generally “recommended that CMS coordinate with NAIC to establish a
means for CO-OPs to meet State solvency and reserve requirements.” Final Rule, 76
Fed. Reg. at 77,403. Addressing those comments, HHS explained:

                  We will work with each loan recipient to structure their
                  Solvency Loans in a manner that will contribute towards
                  meeting State reserve and solvency requirements consistent
                  with State insurance regulation. States are not required to take
                  action that would be inconsistent with State insurance regulation.
                  Therefore, loan recipients must work with State insurance

15  NAIC Def’n of Surplus Note, supra note 14; see also Statutory Accounting Principles, NAIC,
https://content.naic.org/cipr_topics/topic_statutory_accounting_principles.htm (Feb. 27, 2020)
(“Most insurers authorized to do business in the United States and its territories are required to
prepare statutory financial statements in accordance with statutory accounting principles (SAP).
. . . [SAP] are designed to assist state insurance departments in the regulation of the solvency of
insurance companies.”).
16   NAIC Def’n of Surplus Note, supra note 14.
17NAIC Def’n of Surplus Note, supra note 14 (explaining that “[t]hese debt-instruments are
permitted to be reported as capital, and not as debt, due to the subordinate nature of the notes,
and they require approval by the commissioner of the state of domicile before original issuance
and before interest and principal repayments can be made”).
18NAIC Def’n of Surplus Note, supra note 14; see also Carnegie v. Mut. Sav. Life Ins. Co., 2004 WL
3715446, at *9 n.57 (N.D. Ala. Nov. 23, 2004) (discussing NAIC’s risk-based capital system,
which “uses a formula that establishes the minimum amount of capital necessary for an
insurance company to support its overall business operations” and then compares “[t]hat
amount . . . to the company’s actual statutory capital to determine whether a company is
technically solvent” (quoting Brian K. Atchinson, The NAIC’s Risk–Based Capital System, 2 NAIC
Research Q. 1 (Oct. 1996))).

                                                  18
              regulators to identify loan structures that will meet State
              requirements. Significant flexibility is afforded to loan
              applicants in structuring their Solvency Loans to meet State
              standards. Applicable loan structures may include but are
              not limited to structuring a Solvency Loan as a surplus note
              or responsibly structuring a Solvency Loan so that premium
              revenue is applied towards paying claims for covered services to
              enrollees and meeting cash reserve requirements before loan
              repayments to CMS.

Id. at 77,403–04 (emphasis added). HHS generally warned prospective CO-OPs that
“[i]t is incumbent upon applicants to work with their State insurance regulators to
identify appropriate loan structures that will meet the requirements of their State
insurance department.” Id. at 77,404.

          3. The Loan Agreement Limits the Government’s Power to Offset Amounts
             Owed to the Receiver

       In Huna Totem Corp. v. United States, the Federal Circuit succinctly explained how
this Court must approach contract interpretation:

              The “principal objective in deciding what contractual
              language means is to discern the parties’ intent at the time the
              contract was signed.” [Winstar Corp. v. United States, 64 F.3d
              1531, 1540 (Fed. Cir. 1995)]. However, a court may only give
              effect to the expectations that are consistent with the objective
              language of the contract. City of Oxnard v. United States, 851
              F.2d 344, 347 (Fed. Cir. 1988). This court has also recently
              stated that “[w]e must interpret the contract in a manner that
              gives meaning to all of its provisions and makes sense.”
              McAbee Const. Co. v. United States, 97 F.3d 1431, 1435 (Fed. Cir.
              1996) (citations omitted).

135 F.3d 775 (Fed. Cir. 1998). If any ambiguity exists, the Court interprets the contract
to reflect “the intent of the parties at the time the agreement was made.” Pagan v. Dep’t
of Veterans Affairs, 170 F.3d 1368, 1371 (Fed. Cir. 1999) (citing King v. Dep’t of Navy, 130
F.3d 1031, 1033 (Fed. Cir. 1997)). In either case, the Court “must interpret the language
in the context in which it is written” — to include “the context of a regulatory statute.”
Am. Bankers Ass’n, 932 F.3d at 1382. For the reasons explained below, the Court agrees
with the Receiver, Pl. Resp. at 30–31; Pl. Rep. at 3, 7–9, that the Loan Agreement
precludes the government’s offsets.

                                             19
               a. The Plain Meaning of Section 3.4 of the Loan Agreement Controls

       Having reviewed in detail all the Loan Agreement provisions upon which the
parties rely, the Court concludes that the alpha and omega of this case is Section 3.4 of
the Loan Agreement, which covers “Security for the Loans”19 and provides, in relevant
part:

               Because the intent of the Loans, and the Solvency Loan in
               particular, is to provide financing to [NHC] that meets the
               definition of “risk based capital” for State Insurance Law
               purposes, the Loans will have a claim on cash flow and
               reserves of [NHC] that is subordinate to (a) claims payments,
               (b) Basic Operating Expenses, and (c) maintenance of
               required reserve funds while [NHC] is operating as a CO-OP
               under State Insurance Laws.

A157 (Loan Agreement, Section 3.4) (emphasis added). The plain language of this
provision limits the government’s power to offset for several reasons. Chevron Corp. v.
Republic of Ecuador, 949 F. Supp. 2d 57, 68 (D.D.C.) (“plain-meaning analysis . . . end[s]
the matter . . . in the interpretation of contracts, judgments, and statutes”), judgment
entered, 987 F. Supp. 2d 82 (D.D.C. 2013), and aff’d sub nom. Chevron Corp. v. Ecuador, 795
F.3d 200 (D.C. Cir. 2015).

       First, the provision applies to the “Loans” — plural — which term the Loan
Agreement expressly defines as including both the Start-Up Loan and the Solvency Loan
disbursements. A154 (Loan Agreement, Section 2.1 (“Defined Terms”)) (“‘Loan’ means
the total amount of all outstanding Start-Up Loan disbursements, or the total amount of
all outstanding Solvency Loan disbursements, respectively and individually, as the
context or usage requires; ‘Loans’ means both of them together.” (emphasis added)). Thus,
the Court proceeds on the premise that whatever Section 3.4 accomplishes, it does so
not only with respect to the Solvency Loan but also for the Start-Up Loan.

      Second, Section 3.4 reflects the parties’ subordination agreement, with the plain
language making clear that the Loans’ claim on NHC’s funds are “subordinate to”

19“Security” is defined as “[c]ollateral given or pledged to guarantee the fulfillment of an
obligation; esp., the assurance that a creditor will be repaid (usu. with interest) any money or
credit extended to a debtor.” Security, Black’s Law Dictionary (11th ed. 2019). A “security
agreement serves the purpose of defining and limiting the collateral subject to the creditor’s
security interest.” In re Macronet Grp., Ltd., 2004 WL 2958447, at *4 (Bankr. N.D. Ill. Apr. 22,
2004); see also Franch v. HP Locate, LLC, 2015 WL 7251678, at *5 (N.D. Tex. Nov. 16, 2015) (a
“security agreement defines the collateral to enable the debtor and other interested persons to
identify the property that the creditor may claim as security”).

                                                20
claims payments and basic operating expenses. A157 (Loan Agreement, Section 3.4).20
The very definition of “subordinate” means that a claim’s priority is reordered to a
lower position. See Subordinate, Black’s Law Dictionary (11th ed. 2019) (defining
“subordinate” as “[p]laced in or belonging to a lower rank, class, or position”); Debt,
Black’s Law Dictionary (11th ed. 2019) (defining “subordinate debt” as a “[a] debt that
is junior or inferior to other types or classes of debt” and noting that “[s]ubordinate debt
may be unsecured or have a low-priority claim against property secured by other debt
instruments”); see also Republic Bank & Tr. Co. v. Bear Stearns & Co., 683 F.3d 239, 254 n.6
(6th Cir. 2012) (explaining that “subordination refers to the order of payment”); In re
Plourde, 418 B.R. 495, 506 n.18 (B.A.P. 1st Cir. 2009) (“practically speaking, relegation to
subordinated status means receiving no distribution from the estate in most cases”).

       Accordingly, Section 3.4 is a subordination agreement, “whereby one creditor
(the junior creditor) agrees that, in the event of a default or bankruptcy, another creditor
(the senior creditor) will receive repayment in full before the junior creditor receives
payment on its loans.” In re Southeast Banking Corp., 156 F.3d 1114, 1118 (11th Cir. 1998)
(emphasis added); see also In re Ocean Blue Leasehold Prop. LLC, 414 B.R. 798, 804 (Bankr.
S.D. Fla. 2009) (“Subordination agreements provide that in the event of a default or
bankruptcy, the senior creditor will receive repayment in full before the junior creditor
receives any payment.” (emphasis added)).21

         Even if NHC defaulted or otherwise breached the Loan Agreement in some
manner, “the subordination provisions . . . would still be operable and any breach of
contract claim would at most result in a subordinated claim for damages.” In re Lehman
Bros. Inc., 574 B.R. 52, 61–62 (Bankr. S.D.N.Y. 2017) (explaining that “[a]ny claim by the
Employees against [the debtor] for breach of contract should not put the Employees in a
better position than they would have occupied had the contract been fulfilled according
to its terms”), aff’d, 2018 WL 10454936 (S.D.N.Y. Sept. 26, 2018), aff’d sub nom. In re
Lehman Bros. Holdings Inc., 792 F. App’x 16 (2d Cir. 2019); see also In re Lantana Motel, 124
B.R. 252, 255–56 (Bankr. S.D. Ohio 1990) (“In a debt subordination, the agreement
provides that the subordinated creditor’s right to payment and collection will be
subordinate to the rights of another claimant. If the debt subordination is ‘complete,’ the

20See Pl. Resp. at 30 (arguing that “to the extent the Start-Up Loan could even be considered a
“debt” . . . , it is contractually subordinated to NHC’s liabilities for policyholder claims and
basic operating expenses” (citing Loan Agreement, Section 3.4)).
21Cf. Nev. Rev. Stat. Ann. § 104.9339 (West) (“Priority subject to subordination by agreement”)
(Uniform Commercial Code Comment noting that “[t]his section makes it entirely clear that a
person entitled to priority may effectively agree to subordinate its claim”); 11 U.S.C. § 510(a)
(“Subordination”) (United States Bankruptcy Code section providing that “[a] subordination
agreement is enforceable in a case under this title to the same extent that such agreement is
enforceable under applicable nonbankruptcy law”).

                                                21
subordinated creditor is barred from receiving payments until the superior debt is paid
in full.”).

        The government is bound by its subordination agreement. United States v.
Kimbell Foods, Inc., 440 U.S. 715, 733 (1979) (“Because each application currently receives
individual scrutiny, the agencies can readily adjust loan transactions to reflect state
priority rules, just as they consider other factual and legal matters before disbursing
Government funds.”); In re Nivens, 22 B.R. 287, 292 (Bankr. N.D. Tex. 1982) (“SBA
concedes that it has subordinated its lien against crops and proceeds of crops to the
liens of the bank. The determination of the validity of the bank’s liens on crops and
proceeds, and thus the perfection of liens against the subject ‘deficiency’ payments and
‘disaster’ payments, leaves nothing for SBA to setoff.”); Buffalo Nat’l Bank v. United
States, 26 Cl. Ct. 1436, 1442 (1992) (“The meaning of the terms set forth in the
subordination agreement is a question of contract interpretation, an issue of law that
may be disposed of by summary judgment.”).

       Third, Section 3.4 indicates that the very purpose of the “Loans” — again, both of
them —was to provide funding qualifying as “risk based capital.” A157 (Loan
Agreement, Section 3.4). The Loan Agreement defines “Risk-Based Capital Reserves”
as “the amount of required capital that [NHC] must maintain to remain in compliance
with State Reserve Requirements.” A156 (Loan Agreement, Section 2.1). The Loan
Agreement, in turn, defines “State Reserve Requirements,” in relevant part, to “mean[]
the financial reserve requirements that [NHC] must meet under applicable State
Insurance Laws for the delivery of health insurance under a CO-OP” and further
provides that “[a] statement of compliance from the host state will be [a] milestone of
Start-Up and ongoing operations.” Id. In that regard, the Loan Agreement included a
document the parties themselves characterized as the “[a]ffirmation of [s]tate
[r]egulatory [a]cceptance of CO-OP [l]oans as [r]egulatory [c]apital.” A224 (Loan
Agreement, Appendix 10). Thus, the parties agreed to treat both Loans as contributing
to required reserves.22 Although the Court acknowledges that the Proposed Rule and
Final Rule were more concerned with how the Solvency Loan would be treated by state
regulators, nothing in the Final Rule precludes the Start-Up Loan from being treated as
regulatory capital or from contributing to risk-based capital requirements. More
importantly, nothing in the CO-OP Statute reflects a distinction between the two loan
types, in terms of obtaining the preferred regulatory treatment for the Loans; nor, for
that matter, does the Loan Agreement make such a distinction, as noted above.

22“[T]he most accurate picture of the parties’ intent for this contract is their conduct at a time
when both parties still anticipated timely and full performance of the contract.” Pac. Gas & Elec.
Co. v. United States, 536 F.3d 1282, 1290–91 (Fed. Cir. 2008) (citing Julius Goldman’s Egg City v.
United States, 697 F.2d 1051, 1058 (Fed. Cir. 1983) (per curiam) (“A principle of contract
interpretation is that the contract must be interpreted in accordance with the parties’
understanding as shown by their conduct before the controversy.”).

                                               22
       Fourth, the subordination agreement reflected in Section 3.4 of the Loan
Agreement, as described above, is consistent with the Nevada priority statute covering
the CO-OP in the liquidation proceedings, see section 696B.420 of the Nevada Revised
Statutes (the “Nevada Priority Statute”) — at least vis-à-vis the government’s claims.
The Nevada Priority Statute first prioritizes “[a]dministration costs and expenses” and
then “[a]ll claims under policies” over “claims of the Federal Government,” the latter of
which are generally fourth in line. Nev. Rev. Stat. § 696B.420(1)(a)–(d). Thus, it is
hardly surprising that the parties agreed to effectuate a similar priority scheme via
contract.23 Indeed, the Court’s holding here is strongly supported by the Federal
Circuit’s view that the “loan documents recognize Congress’ intent, subordinating any
HHS claim for repayment of the [CO-OP] loan amounts . . . to the claims of
policyholders and other claimants.” Conway, 997 F.3d at 1212–13 (alteration in original)
(internal quotation marks omitted); see also U.S. Dep’t of Treasury v. Fabe, 508 U.S. 491,
493 (1993) (upholding, in case involving insurance company’s liquidation, a state
priority statute favoring — ahead of government claims — policyholders and the
payment of administrative expenses, the latter on the ground that they were essential
for the liquidation and, therefore, for the protection of policyholders).

       Accordingly, the Court rejects the government’s attempt to drive a sharp wedge
between the Start-Up Loan and the Solvency Loan. While the government concedes
that any amounts owed to it pursuant to the Solvency Loan cannot be used to offset
sums payable to the Receiver, Def. MTD at 23; Tr. 15:8–9, 26:21–23, the government
nevertheless contends that NHC’s Start-Up Loan debt may be used to offset sums owed
to the Receiver. Def. MTD at 21–23; Def. Rep. at 3–8; Tr. 15:12–15, 16:16–17:3.

       The government’s putative distinction between the Loans is not supported by
other elements of the Loan Agreement’s plain text. For starters, the Loan Agreement
contains two sections describing the permitted and prohibited uses of the Loan Funds,24
A157–58 (Loan Agreement, Section 3.5 (“Permitted Use of Loan Funds”)); A158–59
(Loan Agreement, Section 3.6 (“Prohibited Uses of Loan Funds”)), and makes no
distinction between the Loans. Notably, both Loans may be used for the “[c]ost
associated with establishing and maintaining capital reserves for [NHC] (including
Risk-Based Capital Reserves) consistent with State Reserve Requirements.” A158 (Loan

23The critical difference is that while the Nevada Offset Statute seems to permit the assertion of
an offset even by a lower priority creditor, here the government specifically agreed that its
ability to collect on the Loans would be subordinate to the other superior creditor categories
identified in Section 3.4 of the Loan Agreement.
24“‘Loan Funds’ or ‘Funds’ means the Disbursements received under this Agreement as from
time to time amended for Start-Up and Solvency Loans, including accrued Interest thereon
under the Amounts of Loan Principal described on the Title Page.” A154 (Loan Agreement,
Section 2.1).

                                                23
Agreement, Section 3.5).25 In responding to a comment on the Proposed Rule that
“recommended that CMS prohibit loan recipients from using their loan funding to pay
claims or subsidize reimbursements to providers[,]” HHS explained at length that such
a restriction is unwarranted due to the purpose of the Loans and the intended use of the
Funds:

               Under the Affordable Care Act, loan recipients are permitted
               to use their loan funds to assist with their start-up costs and
               State solvency requirements, provided that the funds are not
               used to conduct propaganda, or otherwise attempt to
               influence legislation, or for marketing. The purpose of State
               reserve requirements is to preserve the financial viability of
               carriers and enable the payment of claims when provider
               costs exceed premium revenue. A CO-OP that fails to
               maintain appropriate reserves or surplus may be subject to
               regulatory action, seizure, or liquidation. Such a prohibition
               would therefore not only defeat the purpose of the loans but
               would be contrary to the framework of State regulation.
               Furthermore, the statute does not prohibit these costs. Given
               that these loans must be repaid to us in full and that CO-OPs
               should structure their premiums, claims, and administrative
               costs to ensure sustainability, we do not believe that the use
               of loan funds to pay claims would give CO-OPs an advantage
               over existing health insurance issuers.

Final Rule, 76 Fed. Reg. at 77,404.

        In sum, neither the Proposed Rule nor the Final Rule nor the Loan Agreement
itself reflects a clean division between the Start-Up Loan and Solvency Loan. Both
Loans — including the Start-Up Loan — were intended to be used for surplus,26 to

25See also Final Rule, 76 Fed. Reg at 77,395 (“The CO-OP program offers resources, in the form
of loans, to responsibly capitalize new, private, consumer-oriented issuers by increasing the
availability of adequate reserve funding and boosting the ability of CO-OPs to compete in a
brand new, broader insurance marketplace.”); A176 (Loan Agreement, Section 13.1.7 (“Use of
Proceeds”)) (providing that “[NHC] shall use the Funds of the Loans solely for the purposes
permitted under Sections 3.4” (emphasis added)); A177 (Loan Agreement, Section 13.2.4 (“Use
of Proceeds”)) (providing that “[NHC] shall not use Loan Funds or any proceeds of the Loans
for any purposes specified in Section 3.5 above” (emphasis added)). The reference in Sections
13.1.7 and 13.2.4 to Sections 3.4 and 3.5, respectively, are likely scrivener errors and instead
should refer to Sections 3.5 and 3.6.
26Whether the Start-Up Loan qualifies as a surplus note per se is a different issue, but one that is
not dispositive, as the Court explains below.

                                                 24
contribute to regulatory capital, and to meet solvency requirements. Nothing in the
Loan Agreement provides anything to the contrary.

        Finally, the government contends that Section 3.4 is entirely inapplicable here
based on the final qualifying phrase — “while [NHC] is operating as a CO-OP under
State Insurance Laws.” Def. MTD at 17 (emphasis in original) (quoting A157 (Loan
Agreement, Section 3.4); see also Def. Rep. at 4 n.4. But that phrase quite clearly applies
only to the last item in the lettered list of the subordination language: i.e., to “(c)
maintenance of required reserve funds . . . .” A157 (Loan Agreement, Section 3.4). The
government’s argument to the contrary runs afoul of the grammatical “rule of the last
antecedent.” Lockhart v. United States, 577 U.S. 347, 351 (2016) (“This Court has applied
the rule from our earliest decisions to our more recent.”). That rule provides that “a
limiting clause or phrase . . . should ordinarily be read as modifying only the noun or
phrase that it immediately follows.” Barnhart v. Thomas, 540 U.S. 20, 26 (2003) (citing 2A
Norman J. Singer, Sutherland Statutes and Statutory Construction § 47:33 (6th ed. 2000)
(“Referential and qualifying words and phrases, where no contrary intention appears,
refer solely to the last antecedent.”)). This interpretative rule is reflected in Federal
Circuit jurisprudence, see Finisar Corp. v. DirecTV Group, Inc., 523 F.3d 1323, 1336 (Fed.
Cir. 2008), and is applied in the interpretation of contracts, see Yahoo! Inc. v. Nat’l Union
Fire Ins. Co. of Pitt., 255 F. Supp. 3d 970, 975 (N.D. Cal. 2017) (“Another tool for
interpreting the contract provision’s text is the last antecedent rule.”); Miniat v. Ed
Miniat, Inc., 315 F.3d 712, 715 (7th Cir. 2002) (employing the last antecedent rule in
contract interpretation); In re Airadigm Commc’ns, Inc., 616 F.3d 642, 655–56 (7th Cir.
2010); In re Grogan, 476 B.R. 270, 280 (Bankr. D. Or. 2012) (noting that “[a]lthough
usually applied to statutes, the [doctrine] has been applied to contracts as well”), aff’d,
2013 WL 5630627 (B.A.P. 9th Cir. Oct. 15, 2013); United States v. Cmty. Health Sys., Inc.,
666 F. App’x 410, 414 & n.2 (6th Cir. 2016) (“Although the last-antecedent presumption
is often used for statutory interpretation, we have also employed the presumption in
contract interpretation.”).

       In sum, Section 3.4 — as a security and subordination agreement — remains
alive, well, and operative.27

27  Indeed, the entire point of such an agreement is that it delineates the lender’s security interest
— and relative priority — in case of the borrower’s default. See supra note 19; see also In re Fin.
Oversight & Mgmt. Bd. for Puerto Rico, 2021 WL 5121892, at *10 (D.P.R. Oct. 29, 2021) (“Although
the DRA Parties do agree that the Security Agreement subordinates the legal priority of some
creditors’ liens to those of other creditors, they oppose any interpretation of the Security
Agreement that would subordinate the payment priorities of the Loans to those of the Bonds.
. . . Nevertheless, that is precisely what the Security Agreement accomplishes.”); In re Kors, Inc.,
819 F.2d 19, 22 (2d Cir. 1987) (explaining that a particular “Loan and Security Agreement”
included “an obligation by [parties] to subordinate their security interests to the Bank’s security
interest”); Bank of Am., N.A. v. Won Sam Yi, 294 F. Supp. 3d 62, 76 (W.D.N.Y. 2018) (noting that

                                                  25
               b. The Parties Intended Both Loans to Qualify as Regulatory Capital

       The government proposes a further distinction between the two Loans based on
the parties’ execution of a Solvency Loan promissory note to replace the original one
included as Appendix 4 to the Loan Agreement. Compare A212–14 (Loan Agreement,
Appendix 4) (superseded), with A233–36 (Loan Agreement, Appendix 4) (replacement).
The new promissory note expressly provides that it “is a Surplus Note.” A234. This
terminology is significant because, as explained above, a surplus note, by definition,
places the holder at the back of the line for liquidation purposes. Because the new,
replacement promissory note (for the Solvency Loan) provides that “[t]he obligation of
[NHC] under this Promissory Note may not be offset or be subject to recoupment with
respect to any liability or obligation owed to NHC[,]” A235, the government argues that
the Court should infer that such a restriction on the government’s offset rights does not
apply to the Start-Up Loan (i.e., because the Start-Up Loan’s promissory note does not
include similar language).

      The government’s argument gives the Court some pause, but the Court
nevertheless rejects it for several reasons.

       First, the mere fact that the parties agreed to make clear for Nevada state
regulatory purposes that the Solvency Loan unquestionably qualifies as a surplus note
does not necessitate an inference that the Loan Agreement’s plain language can be read
to limit Section 3.4’s subordination agreement to the Solvency Loan only. In other
words, as explained above, the subordination agreement covers both Loans irrespective
of whether the Start-Up Loan qualifies as a surplus note.

        Second, the new promissory note does not tell the entire story, but rather must be
read in conjunction with the “Second Amendment to Loan Agreement,” which is the
mechanism the parties used to substitute the new promissory note for the old one.
A229–30 (the “Second Amendment”). In the Second Amendment, the parties agreed it
was “necessary to advance [their] mutual interest that the Nevada Insurance
Commissioner acknowledge the promissory note contained in Appendix 4 of the [Loan]
Agreement as a surplus note within the meaning” of NAIC accounting rules, “and thus
accept the proceeds of the Solvency Loan provided through the Agreement as an asset
for regulatory purposes, consistent with the original intentions of the Parties.” A229
(emphasis added). The parties further agreed in Section 3 of the Second Amendment
that it “advances the original intentions of the Parties under the Agreement, and is not
intended to reflect, and does not reflect, any change to the original intentions of either Party
under the [Loan] Agreement.” Id. (emphasis added).

“Defendants are subject to the ramifications of their default, according to the terms of the
Security Agreement”).

                                                26
        The interpretive problem for the government is that there simply is no language
in the original, unmodified Loan Agreement that distinguishes between the Loans in
terms of the subordination agreement, creditor priority, and offset. The fact that the
parties sought to further clarify their intent with regard to the Solvency Loan for a
specific audience — the Nevada Insurance Commissioner (i.e., for regulatory
accounting purposes) — simply does not compel the inference that a different treatment
was intended for the Start-Up Loan, particularly not where the terms of the underlying
Loan Agreement itself make no such distinctions. See A157 (Loan Agreement, Section
3.1) (“Under this Agreement, [CMS] is providing to [NHC] funds for CO-OP Program
purposes through two Loans, each of which shall be on par with the other for security
purposes[.]”). Put differently, if the Second Amendment merely effectuates the original
intent of Loan Agreement, and its plain language does not distinguish between the
Loans regarding subordination, creditor priority, or offset, the Court cannot make the
inference the government seeks. That is particularly true where, as here, the
government drafted the Loan Agreement.28 Compl. ¶ 56; Proposed Rule, 76 Fed. Reg. at
43,244 (“Other than the 5-year and 15-year repayment periods, the statute leaves the
specific terms of the loans to CMS’s discretion but requires that CMS take into
consideration State solvency requirements.”); Final Rule, 76 Fed. Reg. at 77,392 (noting
that “[t]his final rule. . . establishes terms for loans”).

         Third, the Loan Agreement provides for certain “Conditions Precedent for Loan
Disbursement.” A159–60 (Loan Agreement, Section 3.8). That section of the Loan
Agreement requires that, “[t]o receive any Funds under this Agreement, [NHC] must
. . . continuously meet . . . specific conditions[,]” including that, “[a]s a condition
precedent to Closing of this Agreement, [NHC] must submit an ‘Affirmation of

28“General rules of contract interpretation apply to contracts to which the government is a
party.” Lockheed Martin IR Imaging Sys., Inc. v. West, 108 F.3d 319, 322 (Fed. Cir. 1997). “[T]he
rule of contra proferentem . . . requires that ambiguous or unclear terms that are subject to more
than one reasonable interpretation be construed against the party who drafted the document.”
Turner Constr. Co. v. United States, 367 F.3d 1319, 1321 (Fed. Cir. 2004); see also Guzar Mirbachakot
Transp. v. United States, 104 Fed. Cl. 53, 65 (2012) (“Where a contract has a latent ambiguity,
under the rule of contra proferentem, the contract is construed against its drafter if the
interpretation advanced by the nondrafter is reasonable.”). Thus, where the government is the
contract drafter, “the rule of contra proferentem requires that [a latent] ambiguity be construed
against the government.” WDC W. Carthage Assocs. v. United States, 324 F.3d 1359, 1364 (Fed. Cir.
2003); see also States Roofing Corp. v. Winter, 587 F.3d 1364, 1369 (Fed. Cir. 2009) (explaining that
the “rule of contra proferentem continues to apply” against the government); United Pac. Ins.
Co. v. United States, 497 F.2d 1402, 1407 (Ct. Cl. 1974) (“[I]f a [contract] is ambiguous and the
[contracting party] follows an interpretation that is reasonable, this interpretation will prevail
over one advanced by the Government, even though the Government’s interpretation may be a
more reasonable one since the Government drafted the contract.”); Blount Bros. Corp. v. United
States, 873 F.2d 1451 (Fed. Cir. 1989) (“[T]he government may not now enforce its preferred
interpretation of contract terms it alone drafted because of the doctrine of contra proferentem.”).

                                                 27
Regulatory Acceptance of CO-OP Loans as Regulatory Capital,’ to be attached as
Appendix 10, signed by the Deputy Insurance Commissioner of the State of Nevada.”
A159–60 (Loan Agreement, Section 3.8(iii)(c)). As noted above, NHC submitted the
required documentation, it was included as Appendix 10 to the Loan Agreement, the
parties closed, and, thereafter, and pursuant to that affirmation, the Funds were
disbursed. Now, the Court can readily understand why anyone reviewing the
document at Appendix 10 might question how it satisfies the requirements of Section
3.8 of Loan Agreement. But the parties were free to conclude, as a contractual matter,
whatever they wanted about the import of the documentation at Appendix 10. In that
regard, there is simply no question, both as a matter of fact and law, that the parties
agreed to treat the Appendix 10 document as sufficient; plus, the purpose of that
document was to demonstrate that the Loans — again, plural — were accepted by the
Nevada insurance regulator as regulatory capital.29

       The bottom line is that the government cannot square its view of the terms of the
Start-Up Loan — if it were even possible to distill and isolate such terms out from the
Loan Agreement — with the plain language of the Loan Agreement as a whole.
Whether the Court looks to the plain language of Section 3.4 (containing the
subordination agreement), the language of Section 3.8(iii)(c) (conditioning the closing of
the Loan Agreement on NHC’s submission of the documents in Appendix 10 to NDOI),
or the parties’ contractually agreed-upon treatment of the Loans as documented in
Appendix 10 to the Loan Agreement, all roads lead to the conclusion that the parties
intended both Loans to be treated as regulatory capital (or surplus) and any government
claim against the CO-OP as subordinated pursuant to Section 3.4. Again, such an
outcome is hardly surprising, given that (1) it is generally consistent with the Nevada
Priority Statute, and (2) it is consistent with HHS’s regulatory concern regarding the
Loans’ contributing to state solvency requirements. See, e.g., Final Rule, 76 Fed. Reg. at
77,407 (“In the potential case of insurer financial distress, a CO-OP follows the same
process as traditional issuers and must comply with all applicable State laws and regulations.”
(emphasis added)); Proposed Rule, 76 Fed. Reg. at 43,244 (“In order to assist CO-OPs in
meeting State solvency requirements, the loans will be structured so that premiums
would go to pay claims and meet cash reserve requirements before repayment to
CMS.”).

       Moreover, the Court notes that even when HHS referred specifically to
“Solvency Loans,” HHS itself was not always so precise, using the term on at least one
occasion to include the Start-Up Loans. In the Proposed Rule, for example, HHS
explained as follows:

                  Congress has provided budget authority of $3.8 billion [1] to
                  assist sponsoring organizations in creating such plans and

29   See supra note 22.

                                               28
              [2] to do so with enough capital and reserves to become
              licensed and ultimately effective competitors in State
              insurance markets. These funds will enable CO-OPs to use
              Federal government loans (‘‘Solvency Loans’’) to meet the
              requirements for risk-based capital that State insurance
              commissions impose on health plans to ensure that they will
              be able to finance the services they have contractually
              promised their enrollees.

Proposed Rule, 76 Fed. Reg. at 43,426 (emphasis added). In a similar vein, the Proposed
Rule noted:

              Congress has provided $3.8 billion [1] to assist sponsoring
              organizations in creating such plans and [2] to do so with
              enough capital and reserves to become licensed and
              ultimately effective competitors in State insurance markets.
              The capital requirements for CO-OPs would be financed, in part,
              by member premiums and in part by the $3.8 billion dollars
              available for loans over the next five years.

Id. (emphasis added). In neither of the foregoing excerpts from the Proposed Rule does
HHS distinguish between the two loan types in terms of meeting risk-based capital
requirements. And, significantly, later in the Proposed Rule, HHS explains that the
referenced $3.8 billion (to be used for such capital requirements) includes an “estimated
. . . $600 million . . . for Start-up Loans and $3,200 million . . . used for Solvency Loans.”
Id. at 43,247. Moreover, in estimating net transfer costs — including likelihood of
repayment — HHS did not distinguish between the Loans except in terms of loan
period and applicable interest rate, which, of course, is consistent with the sole statutory
distinction, as explained above. Id. In any event, what is clear is that HHS did not
neatly distinguish between the two types of Loans and, if anything, recognized that
both Loans would contribute to required regulatory capital. In contrast, there is no
indication that HHS intended to make the Start-Up Loan portion of the Loan
Agreement somehow more collectible via offset.

              c. Section 19.12 of the Loan Agreement Does Not Trump the
                 Subordination Agreement in Section 3.4 of the Loan Agreement

       The government relies on Section 19.12 of the Loan Agreement, covering “Right
of Set-Off,” in arguing that it trumps the subordination agreement contained in
Section 3.4. Def. Rep. at 3–4 (citing A188 (Loan Agreement, Section 19.12)). But, as the
Receiver points out, see Pl. Rep. at 1–2, 3–4; Tr. 47:1–20, Section 19.12 is more of a truism
that preserves to the government whatever rights the government would normally have
“as appropriate,” A188 (Loan Agreement, Section 19.12) (delineating that CMS “shall

                                             29
have at its disposal the full range of available rights, remedies and techniques to collect
delinquent debts, . . . as appropriate, including . . . administrative offset” (emphasis
added)). Indeed, Section 19.12 appears to be nothing more than an expanded version of
an applicable regulation providing that “Loan recipients that fail to make loan
payments . . . will be subject to any and all remedies available to CMS under law to
collect the debt.” 45 C.F.R. § 156.520(d) (emphasis added). That, of course, merely begs
the questions whether (1) there is a currently payable debt given the subordination
agreement in Section 3.4, and (2) whether the government’s administrative offset is
available “under law” in this case. Again, the Court concludes that it is not, due to the
subordination agreement contained in Section 3.4 of the Loan Agreement.

        The Court simply cannot read Section 19.12 in the manner the government
proposes without reading the Loan Agreement’s subordination provision (i.e., Section
3.4) out of the contract. The Court, however, must construe the Loan Agreement to give
meaning to every provision whenever possible, and not in a manner that would render
a contract provision “useless, inexplicable, inoperative, void, insignificant, meaningless
or superfluous; nor should any provision be construed as being in conflict with another
unless no other reasonable interpretation is possible.” Hol-Gar Mfg. Corp. v. United
States, 351 F.2d 972, 979 (Ct. Cl. 1965); see also Massachusetts Bay Transp. Auth. v. United
States, 129 F.3d 1226, 1231 (Fed. Cir. 1997) (“It is a fundamental rule of contract
interpretation that the provisions are viewed in the way that gives meaning to all parts
of the contract, and that avoids conflict, redundancy, and surplusage among the
contract provisions. No contract provision can be ignored.” (citations omitted)); Metric
Constructors, Inc. v. Nat’l Aeronautics & Space Admin., 169 F.3d 747, 753 (Fed. Cir. 1999)
(“Courts prefer . . . an interpretation of a contract that gives effect to all its terms and
leaves no provision meaningless.”); NVT Techs., Inc. v. United States, 370 F.3d 1153, 1159
(Fed. Cir. 2004) (“An interpretation that gives meaning to all parts of the contract is to
be preferred over one that leaves a portion of the contract useless, inexplicable, void, or
superfluous.” (citing Gould, Inc. v. United States, 935 F.2d 1271, 1274 (Fed. Cir. 1991)));
Keeter Trading Co. v. United States, 79 Fed. Cl. 243, 257 (2007) (“A corollary of the court’s
goal of harmonizing all contract provisions is that the court will not adopt an
interpretation which renders a contract term nugatory.” (citing United States v. Johnson
Controls, Inc., 713 F.2d 1541, 1555 (Fed. Cir. 1983))).

        In contrast to the government’s reading of the Loan Agreement — which would
effectively nullify the subordination agreement contained in Section 3.4 — the Court’s
approach does not render Section 19.12 meaningless, as the Court can conceive of
circumstances where the CO-OP is not in liquidation, has surplus funds available to pay
back the Loans, but, for whatever reason, fails to do so; in such a case, no “other
provisions of this Agreement” may be read to eliminate the government’s “full range of
available rights . . . as appropriate” to pursue its debt. Moreover, the assertion of an
offset consistent with Section 19.12 may be “appropriate” — putting aside the
liquidation process — if we were dealing with funds exceeding that which is necessary

                                             30
to satisfy the superior creditors referenced in the subordination agreement. In other
words, the Court can imagine a case in which the government’s priority is superior to a
class of creditor other than those specified in the subordination agreement. In such a
case, the Court might well agree that Section 19.12 could be deployed to permit the
government’s offset; the parties apparently concur, however, that all available funds
will be exhausted by the superior creditors delineated in the Section 3.4.30

                  d. Section 693A.180 of the Nevada Revised Statutes Is Irrelevant

       The parties extensively debate the meaning and applicability of section 693A.180
of the Nevada Revised Statutes,31 but the entire issue is something of a red herring.
That statutory provision covers an insurance company’s “Borrowing” and is contained
within Chapter 693A of the Nevada Revised Statutes, which generally governs
“Corporate Powers and Procedures of Domestic Stock and Mutual Insurers.” The
Borrowing provision merely explains how an insurance company must borrow money
to achieve the preferred regulatory accounting treatment of the disbursements (i.e., to
qualify as a surplus note).32 One prerequisite for such treatment is that borrowed
amounts cannot “be the basis of any setoff.” Nev. Rev. Stat. § 693A.180(2).

       In this case, whether or not the Nevada Insurance Commissioner had the
discretion to approve the Loan Agreement, generally — or the Start-Up Loan, in
particular — as a surplus note for regulatory accounting purposes (and whether or not

30Although Section 19.12 of the Loan Agreement indicates that it applies “[n]otwithstanding
any other provisions of this Agreement to the contrary,” A188 (Loan Agreement, Section 19.12),
such “‘[n]otwithstanding’ language may create” at best “a latent ambiguity in the contract,” and
thus “should be construed against the Government as drafter.” Northrop Grumman Corp. v.
United States, 42 Fed. Cl. 1, 13 (1998) (alteration in original). “By carefully selecting loan
recipients and tailoring each transaction with state law in mind, the agencies are fully capable of
establishing terms that will secure repayment.” Kimbell Foods, 440 U.S. at 736. To the extent the
government has failed to do so, the Court will not rewrite the agreement to effectuate what the
government now asserts that it meant to accomplish. Id. at 735–36 (“We believe that had
Congress intended the private commercial sector, rather than taxpayers in general, to bear the
risks of default entailed by these public welfare programs, it would have established a priority
scheme displacing state law.”). Congress and federal agencies know how to make sure the
government comes first as a creditor. Montana v. United States, 124 F.3d 1269, 1276 (Fed. Cir.
1997) (“We find that the regulations and contractual provisions promulgated by [the
Commodity Credit Corporation], in conjunction with the [Commodity Credit Corporation]
Charter Act, which provides that state law cannot be applied where it conflicts with such
provisions, provide a comprehensive scheme for federal lien priority.”).
31   Compl. ¶¶ 58–60, 65; Def. MTD at 21–23; Pl. Resp. at 25–29; Def. Rep. at 7–8; Pl. Rep. at 13–14.
32In other words, this statute tells an insurance company how one type of loan must be
structured but does not otherwise restrict “other kinds of loans obtained by the insurer.” Nev.
Rev. Stat. § 693A.180(5).

                                                   31
the Commissioner did so), has no bearing on whether the parties themselves contractually
agreed to limit the government’s offset rights. Here, the parties agreed that the
government’s security to collect the Loans was subordinated, and the government’s
offset rights accordingly limited, as reflected in: (1) the priority scheme contained in the
Loan Agreement’s subordination agreement (Section 3.4); (2) the parties’ agreement to
treat the Loans the same in terms of security (Section 3.1); and (3) the parties’ agreement
that both Loans qualified as regulatory capital as if they were approved as surplus notes
(Section 3.8 and Appendix 10). See A157; A159–60; A224–36.33

        In any event, there is a meaningful difference between saying, on the one hand,
that to qualify as a surplus note, a loan must abandon setoff rights, and arguing, on the
other hand, that the only way a setoff right may be abandoned is if a loan qualifies as a
surplus note. The former appears to be true; the latter is not. Put differently, even if all

33 On August 21, 2015, NDOI approved NHC’s request to reclassify the Start-Up Loan as
surplus capital on its financial statements. A360–61 (Letter from Amy L. Parks, Acting
Commissioner, NDOI, to Pamela Egan, Chief Executive Officer, NHC (Aug. 21, 2015)); see also
A335 (Pet. for Appointment of Commissioner as Receiver) (describing the accounting treatment
as “a limited one-time permitted practice to report the [Start-Up Loan] as surplus rather than as
a liability in accordance with SSAP No. 15 - Debt and Holding Company Obligations” and
explaining that “this practice was limited to [NHC]’s second quarter reporting period[,] which
ended on June 30, 2015”). These facts could cut either way. On the one hand, applying a
presumption of regularity — and in the absence of any facts in the record demonstrating
otherwise — it seems safe to assume that the Start-Up Loan actually qualified as surplus capital,
which, by definition, would mean that, at least in the view of NDOI, amounts owed for that
loan could not be used as an offset. On the other hand, the fact that the Start-Up Loan may have
been treated differently until the special request suggests that perhaps that segment of the
Loans does not qualify as surplus capital. The Court need not resolve this issue, however, in
light of the Court’s conclusion that the parties agreed to treat the Start-Up Loan and the
Solvency Loan the same. Moreover, there is at least some unrebutted evidence in the record
that NDOI approved the Loan Agreement as a whole, prior to any amendment, pursuant to
section 693.180(3) of the Nevada Revised Statutes. See A601–02 (E-mail from Annette James,
Lead Actuary, NDOI (Nov. 28, 2012, 12:49 PM)) (providing an update of the status of NHC’s
application for admission as a domestic insurer and asking NHC, among other things, to submit
to NDOI “a copy of the final loan or other agreement(s) that will be used to fund the start-up or
ongoing operations of NHC”); A463–548 (E-mail from Iris Salinas, NHC, to Annette James, Lead
Actuary, NDOI (Nov. 28, 2012, 3:27 PM)) (NHC submission of Loan Agreement to NDOI); A3
(Decl. of Barbara D. Richardson) (explaining that “[i]n 2013, as part of its review to issue NHC
its Certificate of Authority, the NDOI reviewed and approved [the Loan Agreement] between
NHC, an HMO, and [CMS] . . . , which included a Start-Up Loan (and promissory note) and a
Solvency Loan (and promissory note)”).

                                               32
surplus notes must disclaim offset rights, that does not mean that a subordination
agreement must first qualify as a surplus note to be effective.34

          4. The Government Cannot Collaterally Attack the Denial of Its Claim in
             the Nevada State Liquidation Proceedings

        While the Federal Circuit in Conway addressed, de novo, the meaning of
Colorado’s offset provision, neither the trial court nor the appellate court in that case
was apparently confronted directly with the question of whether the government could
effectively avoid the results of the state insolvency process by asserting an
administrative offset. The parties here, however, debate that precise issue. Compl.
¶¶ 50–54; Def. MTD at 19–20, 26–29; Pl. Resp. at 23–25, 34–38; Def. Rep. at 8–12; Pl. Rep.
at 9–13, 18–19.

       In resolving that question, the Court begins with Conway, in which the Federal
Circuit recognized that Federal law ordinarily does not preempt state insurance law,
and particularly not state law governing insolvent insurers:

              There are strong justifications for applying the presumption
              against preemption to insurer insolvency law. “[T]he
              regulation of ‘insurance’ . . . has traditionally been under the
              control of the States.” SEC v. Variable Annuity Life Ins. Co. of
              Am., 359 U.S. 65, 68–69, 79 S. Ct. 618, 3 L.Ed.2d 640 (1959)
              (citation omitted). . . . In fact, Congress has recognized the
              benefits of state regulation of insurance: “the continued
              regulation and taxation by the several States of the business
              of insurance is in the public interest.” McCarran–Ferguson
              Act ch. 20, § 1, 59 Stat. 33, 33 (1945) (codified at 15 U.S.C. §
              1011); see also id. § 2, 59 Stat. at 34 (codified as amended at 15
              U.S.C. § 1012) (limiting federal preemption of state insurance
              law).

Conway, 997 F.3d at 1207–08 (alteration in original). This Court reads Conway as
determining that state law — including the liquidation process — is controlling. Id. at
1212. Indeed, the Federal Circuit explained that “for federal law to control in state
insurer insolvency proceedings, the government must overcome the presumption

34Joshua Landy, Fallacy Corner #1: Hooray for the Fallacy of Conversion!, Stanford: Arcade
(Sept. 18, 2010), https://arcade.stanford.edu/blogs/fallacy-corner-1-hooray-fallacy-conversion
(describing the logical “fallacy of conversion”); Affirming the Consequent, RationalWiki,
https://rationalwiki.org/wiki/affirming_the_consequent (explaining “false conversion”).

                                              33
against preemption” and by identifying “a clear and manifest intent to preempt [state]
law that fixes creditors’ rights during insolvency.” Id. at 1208 (emphasis added).35

         In this case, just as in Conway, 997 F.3d at 1211–12, the government is
simultaneously a creditor and debtor to an insolvent CO-OP, and the government’s
rights were fixed during the insolvency process. This Court sees no reason that the
government should be able to collaterally attack the results of the Nevada state
liquidation process, given the Federal Circuit’s reasoning in Conway. There, our
appellate court noted that an HHS regulation defined “liquidation” to mean “that a
State court has issued an order of liquidation for the issuer that fixes the rights and
liabilities of the issuer and its creditors, policyholders, shareholders, members, and all
other persons of interest.” Id. at 1212 (emphasis added) (quoting 45 C.F.R.
§ 153.630(g)(3)(iii)). According to the Federal Circuit, “[i]f a ‘State court . . . order’ fixes
creditors’ rights” — and “the government concedes HHS is a ‘creditor’ in the relevant
sense” — that “is strong evidence HHS understood that state law would control
creditor priority during insolvency[.]” Id. (quoting 45 C.F.R. § 153.630(g)(3)(iii)). Given
that conclusion, and because “the government’s right to offset is generally subject to
state priority schemes,” id. at 1214, this Court holds that the government cannot assert
an offset that would undermine — and effectively would serve as an improper
collateral attack on — the results of the Nevada state liquidation process. See Final
Rule, 76 Fed. Reg. at 77,407 (“In the potential case of insurer financial distress, a CO-OP
follows the same process as traditional issuers and must comply with all applicable State
laws and regulations.”); see also Garrett v. Cassity, 2011 WL 3420606, at *4 (E.D. Mo.
Aug. 3, 2011) (“The Liquidation Plan in the Texas receivership proceeding provides a
comprehensive and mandatory scheme for resolving creditor claims, and . . .
[defendant’s] pursuit of its counterclaims here effectively amounts to a collateral attack
on certain requirements of that scheme.”).36

        Permitting the government to offset the amounts owed to the Receiver would be
fundamentally inconsistent with the Federal Circuit’s conclusion that “HHS preserved
state insolvency law for repayment of CO-OP program loans.” Conway, 997 F.3d at 1212

35The government was hard pressed in oral argument to explain the impact of the Federal
Circuit’s view of the liquidation process on this case. Tr. 19:18–22 (“THE COURT: [W]hat was
the Federal Circuit telling me to do when it says that the state’s liquidation process applies?
[GOVERNMENT]: I think it was telling you to look at what is the state’s liquidation process.”).
36See also Conway, 997 F.3d at 1210 (“[A]lthough it is not conclusive, there is evidence that
Colorado’s priority framework is consistent with the ACA’s ultimate goals. Other than
administrative expenses, Colorado’s priority structure only places policyholder-creditors over
the federal government. Prioritizing policyholder-creditors increases the likelihood individuals
will receive payment on their claims. . . . [A] policy goal promoting the claims of insured
individuals above other debts . . . would be consistent with the ACA’s policy goals.” (citations
omitted)).

                                               34
(“Congress delegated HHS authority to promulgate regulations regarding loan
repayment ‘in a manner that is consistent with State solvency regulations and other
similar State laws that may apply’” (quoting 42 U.S.C. § 18042(b)(3))). For a state’s
insolvency law to function properly, it is axiomatic that the state liquidation process
must be permitted to proceed such that all creditors, including the government, are
subject to it. That is particularly true where, as here, an HHS regulation acknowledges
that the state liquidation process “fixes the rights and liabilities” of the CO-OP and “its
creditors.” Id. (quoting 45 C.F.R. § 153.630(g)(3)(iii)).

        In this case, as detailed supra Section III.B.2, the government participated in the
state liquidation process, submitted a proof of claim, and the Nevada court-appointed
Special Deputy Receiver denied it, explaining “that any purported set-off of amounts
claimed by the United States in the CMS Claim against amounts owed by the United
States to NHC” would: (1) “impermissibly elevate the claims of the United States above
the priority accorded them under [the Nevada Priority Statute] and the Loan Agreement
on which the CMS Claim is based”; and (2) “violate the [Receivership Order] entered by
the Receivership Court.” A427 (Notice of Claim Determination) (emphasis added).
This Court sees no reason to interfere with the results of that process, even assuming
the Court were to agree with the government that its offset is otherwise proper
pursuant to the Nevada Offset Statute.

       Supreme Court jurisprudence supports this Court’s conclusion that the
government should not be permitted to collaterally attack the results of the Nevada
liquidation process. “[T]here are principles unrelated to considerations of proper
constitutional adjudication and regard for federal-state relations which govern in
situations involving the contemporaneous exercise of concurrent jurisdictions, either by
federal courts or by state and federal courts.” Colorado River Water Conservation Dist. v.
United States, 424 U.S. 800, 817 (1976). Such “principles rest on considerations of ‘(w)ise
judicial administration, giving regard to conservation of judicial resources and
comprehensive disposition of litigation.’” Id. at 817 (alteration in original) (quoting
Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180, 183 (1952)).

        Thus, the Supreme Court has long recognized, “for example, that the court first
assuming jurisdiction over property may exercise that jurisdiction to the exclusion of
other courts” and that “[t]his has been true even where the Government was a claimant in
existing state proceedings and then sought to invoke [federal] district-court jurisdiction[.]”
Id. at 818 (emphasis added) (citing and discussing cases, including United States v. Bank
of New York & Trust Co., 296 U.S. 463, 477, 479 (1936)). Similarly, in Princess Lida of Thurn
& Taxis v. Thompson, the Supreme Court held:

              [T]he principle applicable to both federal and state courts that
              the court first assuming jurisdiction over property may
              maintain and exercise that jurisdiction to the exclusion of the

                                             35
               other, is not restricted to cases where property has been
               actually seized under judicial process before a second suit is
               instituted, but applies as well where suits are brought to
               marshal assets, administer trusts, or liquidate estates, and in
               suits of a similar nature where, to give effect to its jurisdiction,
               the court must control the property. The doctrine is necessary
               to the harmonious cooperation of federal and state tribunals.

305 U.S. 456, 466 (1939) (footnote omitted).

        In Levy v. Lewis, 635 F.2d 960, 963 (2d Cir. 1980), the United States Court of
Appeals for the Second Circuit — discussing the Supreme Court’s decision in Burford v.
Sun Oil Co., 319 U.S. 315 (1943) — explained that, “[i]n keeping with Burford’s concern
with non-interruption of state administrative programs, the federal courts have
abstained in numerous areas where state regulation involved matters of substantial
state concern and where state policies were carried out in a statutorily established
regulatory program by state officials.” In Levy, the Second Circuit specifically
recognized that “Burford abstention has been applied to state regulation of insurance”
because of the “complex administrative and judicial system for regulating and
liquidating domestic insurance companies.” Id. (“Liquidation proceedings involve the
adjustment of thousands of claims against the insurer by policyholders and those who
claim under them, as well as claims by present employees, past employees, and general
creditors. Moreover, the claims must be satisfied by marshalling the existing assets of
the insolvent company and by reinsuring existing policies using a state fund established
for this purpose.”).37 More significantly, with respect to the issues in the instant case,
the Second Circuit explained:

               It is also highly significant that the state scheme has been
               adopted pursuant to congressional authorization. In the

37See also Lac D’Amiante du Quebec, Ltee v. Am. Home Assur. Co., 864 F.2d 1033, 1043 (3d Cir. 1988)
(“As read in subsequent cases, Burford stands for the proposition that where a state creates a
complex regulatory scheme, supervised by the state courts and central to state interests,
abstention will be appropriate if federal jurisdiction deals primarily with state law issues and
will disrupt a state’s efforts ‘to establish a coherent policy with respect to a matter of substantial
public concern.’” (quoting Colorado River, 424 U.S. at 814)); Id. at 1045 (explaining that “the
regulation of insurance companies unable to meet their obligations entails the type of strong
state interest in which application of Burford abstention is appropriate” and holding that “[l]ike
the valuable natural resource involved in Burford, solvent and healthy insurance coverage is an
essential state concern” and “[t]he McCarran–Ferguson Act specifically provides that it is in the
public interest for states to continue serving their traditional role as the preeminent regulators
of insurance in the federal system and indicates the special status of insurance in the realm of
state sovereignty”); In re Cash Currency Exch., Inc., 762 F.2d 542, 556 (7th Cir. 1985) (“Insurance

                                                 36
               McCarran–Ferguson Act, 15 U.S.C. [§§] 1011–1015, Congress
               mandated that regulation of the insurance industry be left to
               the individual states. Thus[,] the administrative and judicial
               scheme erected by [the state] to regulate insurance
               companies, including that part enabling the institution and
               implementation of liquidation proceedings, operates pursuant to
               an express federal policy of noninterference in insurance
               matters.

Id. (emphasis added); see also id. at 964 (“[T]he liquidation process would be greatly
impeded by subjecting it to two authorities. The experience of our own federal
bankruptcy courts evidences the importance of consolidating all of the assets of an
insolvent company and gathering all those who have claims against those assets in a
single forum.”).38

      Although this Court is fully aware that the Supreme Court has considerably
narrowed the reach of the Burford abstention doctrine39 — and, to be clear, it does not
apply here40 — its underlying principles,41 when coupled with the Federal Circuit’s

companies are among those entities precluded from being debtors under the [Bankruptcy] Code
because Congress has determined not to interfere with the state’s comprehensive liquidation
scheme. In light of this, abstention from the exercise of federal court jurisdiction, as in Levy,
over claims arising out of such state liquidation proceedings is particularly appropriate.”).
38See also Levy, 635 F.2d at 965 (relying upon Princess Lida and Bank of New York, among other
cases, in noting that the Supreme Court has held “that courts first assuming jurisdiction over
property may exercise their jurisdiction in proceedings to dispose of the property to the
exclusion of other courts”).
39See, e.g., New Orleans Pub. Serv., Inc. v. Council of New Orleans, 491 U.S. 350, 361 (1989);
Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716–18 (1996); see also Munich Am. Reinsurance Co. v.
Crawford, 141 F.3d 585, 589 n.2 (5th Cir. 1998) (“Prior to Quackenbush, we and other courts had
consistently approved Burford abstention in actions against an insurance company involved in
ongoing state delinquency proceedings.”); Oklahoma ex rel. Doak v. Acrisure Bus. Outsourcing
Servs., LLC, 529 F. App’x 886, 896–97 (10th Cir. 2013) (unpublished) (“[T]he Supreme Court has
narrowed application of the Burford abstention doctrine.”).
40See Deiter v. XL Specialty Ins. Co., 488 F. Supp. 3d 881, 886–87 (D.S.D. 2020) (recognizing that,
following the Supreme Court’s decision in Quackenbush, a court may apply Burford abstention —
and thus “decline to exercise jurisdiction, dismiss a suit, or remand the case to a state forum” —
“only when the federal court is sitting in equity, as opposed to a suit involving a claim for
damages”). In this case, the Court is not declining to exercise jurisdiction, dismissing any suit,
or remanding any issue to a state forum.
41Levy, 635 F.2d at 965–66 (“The [Supreme] Court was referring to the accepted principle that
once a court has jurisdiction over a particular res, no other court can proceed in rem with
respect to the same res. The principle is often stated as a matter of jurisdiction: that a second

                                                 37
view of the McCarran–Ferguson Act articulated in Conway, strongly support this
Court’s conclusion that the government is not permitted to assert an offset that is
inconsistent with the results of the Nevada liquidation proceedings. See Levy, 635 F.2d
at 967 (opining that courts should “prevent duplicative litigation in state and federal
forums[] to enable the [state insurance regulator] to consolidate all claims against the
insolvent insurance company, to avoid the delay and disruption which would result
from piecemeal adjudication of such claims, and to promote the federal policy of
leaving regulation of insurance matters to the states”).

       For example, in Munich American Reinsurance Co. v. Crawford, the United States
Court of Appeals for the Fifth Circuit concluded that the district court improperly
invoked Burford abstention because the district court did not have discretion under the
Federal Arbitration Act (“FAA”) to deny plaintiffs their right to an order compelling
arbitration. 141 F.3d 585, 596 (5th Cir. 1998).42 Nevertheless, the Fifth Circuit held:

                 [T]he provisions of Oklahoma law vesting exclusive original
                 jurisdiction of insurance company delinquency proceedings
                 in Oklahoma receivership court and authorizing the court to
                 enjoin any action interfering with such proceedings are laws
                 enacted for the purpose of regulating the business of
                 insurance and, therefore, fall within the scope of the
                 McCarran–Ferguson Act.

Id. Accordingly, the Fifth Circuit concluded that “dismissal of the action was required
because, by operation of the McCarran–Ferguson Act, the FAA is reverse pre-empted to
the extent it permits [plaintiffs] to bring an action against assets of a delinquent
insurance company in a forum other than the Oklahoma receivership court.” Id.

      Similarly, the government here should not be able to obtain —via the assertion of
an administrative offset — that which could not be obtained in a direct suit against the
Receiver. Ruthardt v. United States, 303 F.3d 375, 382 (1st Cir. 2002). Although the
government asserts that such a conclusion implicates sovereign immunity concerns,
Def. MTD at 27–29; Def. Rep. at 10–12,43 the Supreme Court clearly has rejected that
proposition. Bank of New York, 296 U.S. at 479 (“The fact that the complainant in these

court cannot have jurisdiction to proceed in rem if jurisdiction over the res is maintained by
another court. Nevertheless, as the Court appeared to recognize, the principle involved is more
accurately described as a prudential doctrine in which a second court with concurrent
jurisdiction will exercise its discretion to defer to another court for the sake of comprehensive
disposition of rights in a particular piece of property or in a fund.”).
42   This case was decided after Quackenbush. See Munich Am. Reinsurance Co., 141 F.3d at 589 n.2.
43See Tr. 7:13–8:25 (discussing receivership process, the government’s proof of claim in that
process, and sovereign immunity).

                                                 38
suits is the United States does not justify a departure from the rule which would
otherwise be applicable. . . . In this instance, it cannot be doubted that the United States
is free to invoke the jurisdiction of the state court for the determination of its
claim . . . .”); Leiter Mins., Inc. v. United States, 352 U.S. 220, 227 (1957) (explaining that, in
Bank of New York, “there were numerous other claimants, indispensable parties, who
had not been made parties to the federal court suit” and that “[i]n remitting the United
States to the state court, the Court saw no ‘impairment of any rights’ of the United
States or ‘any sacrifice of its proper dignity as a sovereign.’” (quoting Bank of New York,
296 U.S. at 480–81)).44

       These cases, along with Conway, all counsel in favor of this Court’s holding that
the government is bound by the Nevada state liquidation proceedings, like any other
creditor, and cannot collaterally attack the results of those proceedings by asserting an
administrative offset. Ruthardt, 303 F.3d at 382 (“Fabe itself upheld a priority for
administrative expenses of liquidation (and apparently for administrative expenses of
guaranty funds, too) because these reimbursements facilitated payment to
policyholders. In other words, priorities that indirectly assure that policyholders get
what they were promised can also trigger McCarran–Ferguson protection. . . .” (citing
Fabe, 508 U.S. at 495 n.2, 509)); Clark v. Fitzgibbons, 105 F.3d 1049, 1051 (5th Cir. 1997)
(“[A]llowing a creditor or claimant to proceed against an insolvent insurer in federal court
while a state insolvency proceeding is pending would ‘usurp [the state’s] control over
the liquidation proceeding by allowing [the claimant] to preempt others in the
distribution of [the insurance company’s] assets.’” (alteration in original) (emphasis
added) (quoting Barnhardt Marine Ins., Inc. v. New England Int’l Sur. of Am., Inc., 961 F.2d
529, 532 (5th Cir. 1992))); see also AmSouth Bank v. Dale, 386 F.3d 763, 784 (6th Cir. 2004)
(“A coverage claim against a now-insolvent insurer that arose prior to the insolvency is

44Notably, the Supreme Court, in Leiter, distinguished the facts in that case from those at issue
in Bank of New York, in part on the grounds that, in Leiter, “[a]ll the parties in the state court
proceeding have been joined in the federal proceeding.” 352 U.S. at 227. That condition does
not apply here, where the only parties are the Receiver and the United States. See United
States v. Rural Elec. Convenience Coop. Co., 922 F.2d 429, 437, 438 (7th Cir. 1991) (rejecting the
government’s assertion of “a right to an exclusive federal forum” and holding, based on Bank of
New York, that “the presence of federal regulatory interests should not serve to extinguish the
state courts’ power to adjudicate federal claims, particularly when questions of state law
interpretation are involved”); United States v. Pate, 47 F. Supp. 965, 968 (W.D. Ark. 1942)
(“Certainly, if the United States is bound to the same extent as other litigants when it enters one
of its own courts, it is likewise bound when it enters a court of competent jurisdiction of one of
the sovereign states.”); United States v. Vibradamp Corp., 257 F. Supp. 931, 937 (S.D. Cal. 1966)
(“[T]he Government may file and prosecute its claim in the probate court in the same manner as
any other creditor. It has been held, quite understandably, that if the Government chooses [that]
course, it is bound by the determination made by the probate court. But it does not follow from
anything that we have yet discussed that the Government may ignore the probate proceeding
and then recover from those to whom the estate is distributed.” (citations omitted)).

                                                39
of course exactly the sort of claim that must be heard in the liquidation proceedings;
although dismissal under Burford abstention is no longer appropriate under
Quackenbush in damages actions, presumably McCarran–Ferguson protection would
extend to this kind of claim.”); Lacy v. Old Standard Life Ins., Inc., 2005 WL 8171866, at *4
(D. Colo. Sept. 8, 2005) (noting that “[s]ince the passage of the McCarran–Ferguson Act,
federal courts have increasingly deferred to state receivership proceedings” and that
“most federal courts have declined to exercise jurisdiction in disputes that involve
complex and comprehensive state procedures adopted for insurance companies
pursuant to the McCarran–Ferguson Act”).45

       Finally, even the Supreme Court in Quackenbush recognized that an
abstention-based stay may be appropriate when a “setoff issue was being decided by
the state courts” and “to await the outcome of the state court litigation.” 517 U.S. at 731.
Such a “stay to await the outcome of the state court litigation” only makes sense if the
parties are bound by its results. Id. (explaining that such a stay would be “in the
interest of avoiding inconsistent adjudications on that point”).

       In sum, the government cannot use an administrative offset to make an end-run
around the state liquidation process, particularly not where the government elected to
participate in that process and had its claim decided. See Proposed Rule, 76 Fed. Reg. at
43,247 (explaining that “Executive Order 13132 on Federalism establishes requirements
that an agency must meet when a proposed rule imposes substantial costs on State and
local governments, preempts State law, or otherwise has Federalism implications” and
concluding that “[t]his proposed rule does not trigger these requirements”).

           5. The Nevada Offset Statute

       To be clear, although “[s]etoff, in effect, elevates an unsecured claim to secured
status,” Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir. 1984), the Court is inclined to agree
with the government, Def. Rep. at 2, that there is no inherent inconsistency between the
assertion of an offset pursuant to the Nevada Offset Statute, Nev. Rev. Stat. § 696B.440,
and the priority scheme reflected in the Nevada Priority Statute, Nev. Rev. Stat.
§ 696B.420. In fact, in some sense, an offset statute “is, by its very nature, a specie of
preference.” Barnett Bank of Jacksonville v. Florida ex rel. Dep’t of Ins., 507 So. 2d 142, 144

45 See also In re Amwest Sur. Ins. Co., 2004 WL 628217, at *2–3 (D. Neb. Mar. 30, 2004) (finding that
“the Nebraska statute designating the state forum for adjudication of these claims regulates the
business of insurance and, under the McCarran–Ferguson Act, cannot lawfully be
‘invalidate[d], impair[ed], or supercede[d]’ by permitting additional litigation in the federal
court on the basis of diversity” because “[t]he McCarran–Ferguson Act reflects a strong federal
policy of deferring to state regulation of the insurance industry, including insolvency statutes”
(first alteration in original) (quoting Murff v. Pro. Med. Ins. Co., 97 F.3d 289, 293 (8th Cir. 1996)
(internal quotation marks omitted)).

                                                 40
(Fla. Dist. Ct. App. 1987). “It requires that qualifying mutual obligations be set off
against each other and that ‘the balance only shall be allowed or paid.’” Id. (quoting
Fla. Stat. § 631.281, which is identical in substance to the Nevada Offset Statute). The
purpose of an offset statute “is to provide a preference to this limited extent.” Id. Thus,
an offset statute is inherently “consistent with [the priority statute] because [the priority
statute], by creating priorities of claims, also prefers some creditors over others.” Id.46

       The Court need not definitively decide the meaning of the Nevada Offset Statute,
however, because even if the government were correct, the government could only
assert an offset here if there would be funds remaining after the superior creditors
specified in Section 3.4 of the Loan Agreement were satisfied. (And that is not the case
here.)

      First, as explained above, a creditor is permitted to relinquish its priority via a
subordination agreement and, thus, the parties may contract around statutory priority
schemes. Therefore, even if the Nevada Offset Statute is viewed as an exception to the
Nevada Priority Statute, the former cannot displace the government’s contractual
agreement in Section 3.4 of the Loan Agreement.

        Second, the Nevada Offset Statute applies only in the context of the liquidation
proceedings and does not provide a freestanding basis for an agency’s administrative
offset (or counterclaim in this Court). Sunset Com. Bank v. Fla. Dep’t of Ins., 509 So. 2d
366, 367 (Fla. Dist. Ct. App. 1987) (holding that “[w]hile [Florida has] a statutory offset
provision for mutual debts or credits, . . . [no] enactment . . . contains any exemption
from filing requirements for offset claims” and that “the statutory scheme contemplates
that all claims against an entity in receivership be filed with the receiver and determined
by the receivership court” (emphasis added) (citations omitted)). Indeed, the Nevada

46See, e.g., Transit Cas. Co. v. Selective Ins. Co., 137 F.3d 540, 544 (8th Cir. 1998) (“The Missouri
Insurance Code establishes the priority of creditors in the case of an insurer insolvency. This
section, along with the remainder of the statute, dictates the order of distribution of the
insolvent insurance company’s assets at the time the receivership or liquidation order is
entered. If, as is contemplated in Scott v. Armstrong, [146 U.S. 499, 507 (1892),] set-off defines the
nature of the insolvent’s assets, allowing set-off does not subvert the priority of creditors
established by statute.” (footnote omitted)); Prudential Reinsurance Co. v. Superior Ct., 842 P.2d
48, 61 (1992) (“if the Legislature intended to deny setoff unless there were sufficient assets to
satisfy the claims of all claimants in higher priority classes, that result would have been made
explicit in the statute”); In re Midland Ins. Co., 79 N.Y.2d 253, 262 (1992) (“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.’” (quoting Scott, 146 U.S. at 510)).

                                                 41
Offset Statute is part of the Nevada code called “the Insurers Conservation,
Rehabilitation and Liquidation Law.” Nev. Rev. Stat. § 696B.010 (“Short title”). The
Nevada Offset Statute thus cannot be invoked outside of the state liquidation
proceedings. This also provides further support for the Court’s holding that the
government is not exempt from the Nevada liquidation process.

        Third, the government cannot invoke the Nevada Offset Statute to assert a right
that the government effectively relinquished in the Loan Agreement itself (i.e., in the
subordination provision), as the Court has interpreted it above. Owens-Corning Fiberglas
Corp. v. Texas Com. Bank Nat’l Ass’n, 763 P.2d 335, 337 (1988) (“When, as here, a
knowledgeable and sophisticated party, in no need of the court’s protection, enters an
unconditional subordination agreement, this court will not imply or impute conditions
into the agreement.”); see also In re Lantana Motel, 124 B.R. at 256 (“By executing a lien
subordination agreement, the subordinating party agrees to demote the priority of its
lien to that of another secured creditor, thereby delaying its recourse to the identified
collateral until the other party’s secured claim has been satisfied.”); In re Lunan Fam.
Rests., 194 B.R. 429, 444–54 (Bankr. N.D. Ill. 1996) (noting that the “law is well settled
that rights of priority under an agreement of subordination extend to and are limited
strictly by the express terms and conditions of the agreement” (quoting Resol. Tr. Corp.
v. BVS Dev., Inc., 42 F.3d 1206, 1214 (9th Cir. 1994))).47

       C. The Government Cannot Invoke 31 U.S.C. § 3728 to Reassert the Offsets

       In Conway, the Federal Circuit reserved the issue of whether 31 U.S.C. § 3728 may
“prevent [a plaintiff] from enforcing his judgment against the government[.]” 997 F.3d
at 1215–16 (noting that the court “does not reach that issue here”). Although the parties
have not addressed that statute in this case, the Court does so in the interest of avoiding
future — and, in the Court’s view, unnecessary — proceedings. See, e.g., Complaint
¶¶ 1–4, Conway v. United States, No. 21-1808 (Fed. Cl. Sept. 3, 2021), ECF No. 1 (alleging
that the government refused to pay plaintiff pursuant to 31 U.S.C. § 3728, even though

47Although not entirely on point, the United States District Court for the Western District of
Oklahoma’s decision in Oklahoma ex rel. Doak v. Staffing Concepts International, Inc., 2014 WL
296643 (W.D. Okla. Jan. 24, 2014), provides some helpful guidance. In that case, a receiver
pursued a debt from a professional services company. Id. at *1. The defendant company
asserted a setoff, based on a state statute very similar to the Nevada Offset Statute. Id. at *4.
The district court permitted the setoff, but implicitly concluded that the underlying contract
giving rise to the setoff amount controlled the outcome. Id. at *5. In that case, however, “[t]he
contract . . . provided for repayment” from a particular related-company’s assets “in the event
of a liquidation”; specifically, the contract provided that “repayment of the balance of the said
borrowed funds . . . shall be paid . . . out of any assets remaining after the repayment of all policy
obligations and all other liabilities . . . .” Id. (emphasis added) (quoting the relevant contract).
While the district court did not focus on the emphasized language, what is clear is that the
district court concluded the offset was proper only based on the applicable contract’s terms. Id.

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plaintiff obtained a money judgment from this Court, a result the Federal Circuit
affirmed on appeal).

       As the Federal Circuit noted, 31 U.S.C. § 3728 provides that “[t]he Secretary of
the Treasury shall withhold paying that part of a judgment against the United States
Government presented to the Secretary that is equal to a debt the plaintiff owes the
Government.” Conway, 997 F.3d at 1215-16 (quoting 31 U.S.C. § 3728). The remaining
statutory language, however, makes clear that the Treasury may not employ § 3728 to
avoid any part of a judgment entered in this case based on the same offsets addressed
herein. In particular, that provision delineates specific steps the Treasury must follow
when withholding part of a judgment, as follows:

             (b)   The Secretary shall--
                   (1)    discharge the debt if the plaintiff agrees to the
                          setoff and discharges a part of the judgment equal
                          to the debt; or
                   (2A)   withhold payment of an additional amount the
                          Secretary decides will cover legal costs of
                          bringing a civil action for the debt if the plaintiff
                          denies the debt or does not agree to the setoff; and
                   (B)    have a civil action brought if one has not already
                          been brought.
             (c)    If the Government loses a civil action to recover a debt
                    or recovers less than the amount the Secretary
                    withholds under this section, the Secretary shall pay the
                    plaintiff the balance and interest of 6 percent for the
                    time the money is withheld.

31 U.S.C. § 3728 (emphasis added). This provision thus permits a plaintiff which has
obtained a judgment to object to the setoff and requires the government to bring a civil
action to recover the setoff amount (and places the government at risk for an additional
financial penalty for losing such an action).

        In this case, however, the Court holds that the government is not entitled to
collect any amounts under the Loan Agreement until superior creditors, specified in
Section 3.4, are satisfied and the Nevada liquidation process permits the government to
recover. Until then, there is nothing for the Treasury to setoff, and any civil action by
the government to recover — following the issuance of a judgment in this case — would
be barred as res judicata. Bonnafon v. United States, 14 Ct. Cl. 484, 490 (1878); Hines v.
United States ex rel. Marsh, 105 F.2d 85, 89 (D.C. Cir. 1939) (“It is the judicially
established judgment which allows the government to reduce by, and off-set, the

                                            43
judgment obtained against it, and not the administrative determination that a set-off
exists, or might exist.”); Am. Potash Co. v. United States, 8 F. Supp. 717, 719–20 (Ct. Cl.
1934) (“The whole purpose of the act was to compensate a claimant by way of interest
on an amount which had been allowed by legal authority for the time during which it
was wrongfully withheld from him, if it should be ultimately determined that he was
not otherwise indebted to the United States. . . . There might be reasonable cause for
withholding an amount duly allowed by legal authority where there is a definite claim of
indebtedness to the United States, but in the case at bar there was apparently no
reasonable cause to believe at the time the amount was withheld that the plaintiff was
otherwise indebted to the United States.” (emphasis added)).48

        In sum, § 3728 simply “does not confer upon the Secretary of the Treasury the
power to review the decrees and judgments of established courts of justice.” Bonnafon,
14 Ct. Cl. at 491 (citing Act of Mar. 3, 1875, ch. 149, 18 Stat. 481 (current version at 28
U.S.C. § 3728)). “Such a power would be in conflict with the fundamental principles of
the whole judiciary system” and “would confer upon the Secretary of the Treasury, an
executive officer of the government, judicial power, contrary to article 3, section 1, of the
Constitution[.]” Id. (citing United States v. O’Grady, 89 U.S. 641 (1874)); see also United
States v. Jones, 119 U.S. 477, 480 (1886) (“accounting officers of the government [possess]
no authority to re-examine the judgment” but rather the statute “only provides a way of
payment and satisfaction if the creditor shall, at the time of the presentation of his
judgment, be a debtor of the United States for anything except what is included in the
judgment, which is conclusive as to everything it embraces” (emphasis added) (citing 18 Stat.

48In Bonnafon, the Court of Claims explained the mechanics of a substantially similar
predecessor statute to § 3728:
                The Secretary must inform the judgment creditor of the amount of
                debt claimed against him, that he may make his election whether
                he consents to the set-off, accepts the balance, and will discharge
                his judgment, or denies the indebtedness and refuses to consent
                thereto. In the former case, it becomes a voluntary settlement upon
                the execution of the proper discharges contemplated by the act, and
                whether or not the claim set up by the Secretary is a legal and valid
                debt which could be enforced at law becomes immaterial, since the
                debtor has waived his right to have it tested by proceedings in
                court, and he is estopped from setting up any further claim on his
                judgment. In the latter case, if the judgment creditor denies the
                indebtedness, and refuses to consent to the set-off, he may have the
                matter of his liability tried in a suit at common law.
14 Ct. Cl. at 490.

                                                 44
at 481 (current version at 28 U.S.C. § 3728))). Indeed, the Federal Circuit’s predecessor
tribunal, the United States Court of Claims, already has addressed this very issue:

              Congress did not mean to permit the Comptroller General to
              withhold payment of a judgment in whole or in part on his
              own ipse dixit; if he did withhold it, he must immediately
              seek a judicial determination of his right to do so, unless the
              debt was already in suit. If it was already in suit, the desired
              judicial determination could be had in that suit, and, hence, it
              was not required in such case that the Comptroller General
              institute suit. The objective was the judicial determination; it
              made no difference whether plaintiff or defendant initiated
              the action to secure the determination. So, if a suit was
              already pending, it was not necessary for the Comptroller
              General to institute a suit. The provision for a judicial
              determination of the propriety of the withholding was plainly
              for plaintiff’s benefit. . . . There is nothing indicating an
              intention to prevent plaintiff from doing what he is doing
              here, that is, to sue for a wrongful withholding, and in this
              way to secure the judicial determination which Congress
              prescribed.

Eastport S. S. Co. v. United States, 130 F. Supp. 333, 335 (Ct. Cl. 1955) (emphasis added)
(citing Act of Mar. 3, 1933, ch. 212, § 13, 47 Stat. 1489, 1516–17 (current version at 31
U.S.C. § 3728)).

      The government may not invoke 31 U.S.C. § 3728 to avoid the final judgment
ultimately entered in this case.

VII.   CONCLUSION

        For all the above reasons, the Court holds that the Receiver is entitled to
judgment as a matter of law on its claims. Plaintiff’s motion for summary judgment on
liability is GRANTED with respect to Counts I–V. The government’s motion to dismiss
is DENIED.

       Because the Court cannot discern from the filings the precise amount owed to the
Receiver (absent the government’s offsets), the parties are directed to meet-and-confer
regarding the damages payable to Plaintiff. On or before Thursday, December 30, 2021,
the parties shall file a joint stipulation or joint status report, indicating an agreed-upon

                                             45
sum for the purpose of entry of final judgment in this matter or proposing a schedule
for further proceedings if they are required to fully resolve this case.

      IT IS SO ORDERED.

                                                      s/Matthew H. Solomson
                                                      Matthew H. Solomson
                                                      Judge

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