Iowa Supreme Court rejects the Iowa Department of Human Services claim to a super priority lien that would disregard a bank’s perfect security interest

On April 10, 2015, the Supreme Court of Iowa in Iowa Department of Human Services v. Morse Health Care Services, et al. (14-1542) and Iowa Department of Human Services v. Community Care, Inc., et al. (14-1522)§ rejected the contention of the Iowa Department of Human Services that Iowa Code §249A.44 and §680.7  of the granted to the Iowa Department of Human Services the ability to unilaterally appoint a receiver to manage the affairs of a Medicaid recipient and obtain reimbursement for all of the receiver’s fees and expenses by use of all of the Medicaid recipient’s collateral, even though that collateral was subject to a prior perfected security interest held by a bank.

Recognizing the importance of the issue before it, the Iowa Supreme Court placed the banks’ appeals on an expedited track.  Oral arguments were held on March 11, 2015 with the Court’s Rulings being issued on April 10, 2015.

In its opinion, the Court rejected all of the arguments proffered by the Iowa Department of Human Services.  The Court, instead, adopted the arguments of the banks and held that neither Iowa Code §249A.44(3) nor Iowa Code §680.7 authorize the expenses of the receiver to be charged against a secured creditor’s collateral.  Iowa will follow the general equitable rule on receiverships under which the costs of a receiver may be charged against a third party’s security interest only to the extent the secured party has been shown to benefit from the receiver’s services or in the event the secured party has consented to the appointment of the receiver.  This rule follows closely the priority provisions set forth in the Federal Bankruptcy Code, 11 U.S.C. Section 507(a)(1)(c).

In adopting the general equitable rule on receiverships, the Iowa Supreme Court avoided having to rule on serious constitutional concerns presented by the Iowa Department of Human Services’ position regarding the retroactive effect of the statutes it relied upon for priority.

This posting follows-up on Joseph M. Borg’s Banks Beware (January 14, 2015).

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice.  Please consult with an attorney if specific legal information is needed.