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In re Los Robles Care Ctr., Inc.

United States District Court, C.D. California

May 14, 2015

IN RE DEBTOR: LOS ROBLES CARE CENTER, INC. CASITAS EUBANKS GROUP, INC., formerly Los Robles Care Center, Inc., Plaintiffs,
v.
SECRETARY OF U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES on behalf of Centers for Medicare and Medicaid Services; U.S. SMALL BUSINESS ADMINISTRATION; SECRETARY OF U.S. DEPARTMENT OF TREASURE, Defendants

Page 309

USBC Central District of California - Northern Div, 9:09-bk-13125-RR, Adversary Case: 9:13-ap-1143-RR.

For Casitas Eubanks Group, Inc., formerly Los Robles Care Center, Inc., Appellant: Daren R Brinkman, Kevin C Ronk, Laura J Portillo, LEAD ATTORNEY, Brinkman Portillo Ronk APC, Westlake Village, CA.

For Secretary of U.S. Department of Health and Human Services, on behalf of Centers for Medicare and Medicaid Services, U.S. Small Business Administration, Secretary of U.S. Department of Treasury, Appellees: Elan S Levey, LEAD ATTORNEY, AUSA - Office of U.S. Attorney, Los Angeles, CA.

Page 310

ORDER AFFIRMING BANKRUPTCY COURT'S DISMISSAL OF PLAINTIFF'S COMPLAINT

[Dkt. No. 8]

DEAN D. PREGERSON, United States District Judge.

Presently before the Court is Plaintiff's appeal from a dismissal by the Bankruptcy Court of its complaint for lien determination. (Dkt. Nos. 1, 8.) Having considered the parties' submissions, the Court adopts the following order.

I. BACKGROUND

Defendant United State Small Business Administration (" SBA" ) is a federal government entity that held, as security for certain small business loans, liens against some of Plaintiff's commercial property. Plaintiff filed for Chapter 11 bankruptcy in 2009. (See generally Bankruptcy Case No. 9:09-bk-13125-RR.) While that bankruptcy was pending, in August 2013 the United States Treasury Department applied certain Medicare receivables owed to Plaintiff to offset Plaintiff's debt to SBA. (Appellant's Opening Br. at 4.)

Plaintiff argues that this direct action on the debt constitutes an " election of remedies" under Cal. Code Civ. P. § 726. See, e.g., Walker v. Cmty. Bank, 10 Cal.3d 729, 733, 111 Cal.Rptr. 897, 518 P.2d 329 (1974) (" [W]here the creditor sues on the obligation and seeks a personal money judgment against the debtor . . . he makes an election of remedies, electing the single remedy of a personal action, and thereby waives his right to foreclose . . . ." ). Plaintiff argued in a complaint to the Bankruptcy Court that because SBA elected to recover via the application of Medicare receivables, it could not also assert its security interest in the sale of the property. (Appellant's Opening Br. at 4; Appellant's App'x, Tab 1.)

Defendants filed a motion to dismiss the complaint, arguing that the exercise of the setoff was inadvertent and that in any event federal law preempts § 726.[1] (Appellant's App'x, Tab 2.) Accompanying the motion were declarations by SBA employees indicating that the referral of the case to the Treasury for setoff was inadvertent, that the SBA never intended to use or elect setoffs prior to enforcing its liens, and that the setoffs were refunded when the error was discovered.

On January 16, 2014 the Bankruptcy Court granted the motion to dismiss. (Appellant's App'x, Tab 5.) Although the order did not state the bankruptcy judge's reasoning, during a hearing on the motion the judge entered into the record several " findings of fact and conclusions of law." (Appellant's App'x, Tab 6 at 15:6-7.) First, the bankruptcy judge cited to 13 C.F.R. 101.106 as " a congressional statement that no state law will contravene any attempt by the SBA to collect or no state law can defeat an obligation to the SBA." (Id. at 8:13-16.) She found that " Congress has determined that the ability of the United States to have a functional SBA program for small business loans is of such national importance that 726 of the California Code of Civil Procedure would not be applicable." (Id. at 14:18-22.) She also noted that one of the purposes of § 726

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was to prevent " a multiplicity of lawsuits," and that applying § 726 in this case would not " reduce litigation." (Id. at 13.) Finally, she concluded that even in ยง 726 were technically available, the violation was " inadvertent" and " of negligible duration," and therefore not ...


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