Banks beware: If your borrower receives Medicaid reimbursement payments from the state, your first priority interest may be in jeopardy

One of the most important considerations for every bank in any lending relationship is the security the borrower is willing to put forth to ensure repayment of the debt. Iowa law has always protected the priority interest of banks and other lenders who have properly perfected their mortgages and financing statements. However, a relatively new statute signed into law in July of 2013 poses a significant threat to lenders’ secured collateral when dealing with borrowers who receive Medicaid reimbursement payments from the State.

Medicaid is a heavily regulated cooperative federal-state insurance program that provides financial assistance to people with low income to allow them access to medical and other health related services. The health care providers that accept Medicaid insurance rely on reimbursement for their services from the State. In recent years the State has become increasingly concerned with stopping and attempting to recoup overpayments it believes it has made to health care providers through the Medicaid program. To assist the State with the recapture of funds, Iowa Code section 249A.44 was signed into law which, in addition to authorizing the State to withhold Medicaid reimbursement payments, granted the State the ability to file an emergency action seeking: an injunction, the disclosure of assets, and the appointment of a receiver against the health care provider it believes received Medicaid reimbursement overpayments. Although the idea of this statute may sound reasonable on its surface, in recent cases the State has taken the position that once a receiver is appointed over the health care provider’s assets, all costs and fees associated with the receivership, including the receiver’s attorneys’ fees, become a “super-priority” interest that must be paid from the health care provider’s assets ahead of preexisting liens. The devastating significance of the State’s position as it relates to lenders’ secured collateral cannot be overstated because in most cases the only funds that remain, once the State withholds Medicaid reimbursements and the receiver shuts down the business, are the real property and personal property of the health care provider. Even though a lender may have a longstanding perfected mortgage and financing statement on the real and personal property, the State has taken the position that all receivership costs, whether such costs benefited the lender or not, must be paid in first priority from the sale of the property. Once those fees are paid, the lender could be placed in the pool of unsecured creditors fighting for leftovers.

It is expected that the Iowa Supreme Court will shed more light on the proper interpretation of Iowa Code section 249A.44 as it relates to the priority interest of receivership costs later this year. In the meantime, banks and other lenders should take the State’s interpretation of Iowa Code section 249A.44 into consideration when making lending decisions involving health care providers who rely on Medicaid reimbursement payments from the State.