Zacher v. Paterson

Citation: 447 F. App'x 236Docket: No. 10-3009-bk

Court: Court of Appeals for the Second Circuit; November 20, 2011; Federal Appellate Court

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Plaintiffs, a debtor management company operating several nursing homes, including Williamsville Suburban, LLC, appealed a district court decision that reversed a bankruptcy court's summary judgment in their favor against the State of New York and its agencies. The plaintiffs argued that the State should be equitably estopped from revoking Williamsville’s nursing home operating certificate. For equitable estoppel under New York law, plaintiffs must demonstrate that the State engaged in conduct that misrepresented or concealed material facts, intended for the plaintiffs to rely on that conduct, and possessed knowledge of the true facts. Additionally, plaintiffs must show they lacked knowledge of the true facts, relied on the State’s conduct, and suffered a prejudicial change in position.

The court found that the plaintiffs failed to establish the first element of equitable estoppel. They did not provide evidence that any State employee made a definitive representation that the Berger Commission would not recommend the closure of Williamsville. Instead, the plaintiffs inferred such a representation from the State's participation in the bankruptcy proceedings. The court rejected this argument, noting that inquiries made by the Berger Commission regarding Williamsville did not indicate that the Department of Health was aware of any imminent closure. Furthermore, any speculation by State employees about the Commission's potential actions was insufficient, as the actual recommendation for closure was not made until after the bankruptcy reorganization plan was confirmed.

The State's approval of the reorganization plan on January 5, 2006, and lack of objection to the bankruptcy court's orders do not imply that New York would forgo its regulatory powers over Williamsville during the reorganization. Interpreting it as such would suggest a nine-year waiver of the state's right to revoke the operating license, conflicting with established precedent recognizing the dual roles of government entities as both creditors and regulators. The plaintiffs' claim of misrepresentation is countered by the plan's provisions that safeguard the State’s regulatory authority. Additionally, the New York Court of Appeals has consistently ruled that estoppel cannot be applied against governmental agencies to hinder their statutory duties, unless in exceptional circumstances to prevent injustice. The creation of the Berger Commission, which operates independently and is tasked with recommending the closure of unnecessary nursing homes, predates the bankruptcy confirmation, making it clear that Department of Health employees must follow the Commission’s recommendations unless overridden by legislative or gubernatorial action. Plaintiffs’ assertion that they were misled is unfounded since they were aware that the Department of Health had a legal obligation to act on the Commission's directives. Their reliance on a previous case involving explicit promises from a local government is inappropriate here, as the circumstances differ significantly. Thus, plaintiffs cannot invoke the concept of 'manifest injustice' to prevent the Department from fulfilling its legal responsibilities.

Plaintiffs claim that 11 U.S.C. § 1141(a) preempts state law requiring the revocation of Williamsville’s operating license, arguing that federal law binds the State as a creditor to the confirmed plan's terms. However, federal courts are hesitant to find conflict preemption of state law related to police power unless there is an irreconcilable conflict. The issue of preemption was not adequately preserved for appeal, as it was briefly mentioned in a single sentence in the plaintiffs' reply brief. 

Regarding injunctive relief, plaintiffs contend that the bankruptcy court permanently enjoined the State from revoking the operating certificate under 11 U.S.C. § 105(a). However, the court's permanent injunction was based on an equitable estoppel claim, not solely on § 105(a). The plaintiffs did not pursue § 105(a) as an alternative argument in their motion for summary judgment, thus failing to preserve it for appellate review.

As a result, the district court's judgment is affirmed, its order staying the judgment pending appeal is vacated, and the matter is remanded to the bankruptcy court for further proceedings. The court does not need to determine whether federal or New York law governs estoppel, as the plaintiffs' claim fails even under New York law. The bankruptcy court's confirmation order states that it constitutes all necessary approvals and consents required by state law for the implementation of the Amended Plan.