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Washington Appellate Court Finds Release of Lis Pendens Not Effective Until Recorded Banner Image

Washington Appellate Court Finds Release of Lis Pendens Not Effective Until Recorded

Month: May 2021

Washington Appellate Court Finds Release of Lis Pendens Not Effective Until Recorded

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The Court of Appeals of Washington, Division Two, recently held that the release of a lis pendens is not effective until it is recorded. Furthermore, it held that where there is a recorded lis pendens on a property on the day it is sold, the purchaser of that property cannot claim to be a bona fide purchaser for value even where the release of that lis pendens was effectuated the day prior. See Guardado v. Taylor, et al., 2021 WL 1985442 (Wash. Ct. App. May 18, 2021).  In 2008, Otto and Diana Guardado dissolved their marriage, and as part of the dissolution decree, Otto (“Guardado”) was awarded the couple’s home. Later, Diana brought a suit for breach of contract stemming from an agreement that Otto would take Diana’s name off the home’s mortgage, and the court in that matter ordered that the dissolution decree be modified, allowing for a special master to sell the property. Otto sought to stay this judgment pending an appeal, and was required to post certain bonds to do so.  He did not, but instead recorded a lis pendens on the property. Meanwhile, Mark and Michelle Taylor were interested in purchasing the property, and they, among other things, received a title report that informed them of the pending appeal and the lis pendens, as well as communicated with Guardado himself about the same. On November 16, Guardado signed the release on the lis pendens. The next day, the Taylors closed on the property, paying $240,000 and a deed conveying the property to them was signed. The deed, as well as the release of the lis pendens, was recorded on November 18.

After the sale to the Taylors, an appellate court vacated the dissolution order that allowed for the sale of the property.  Guardado then filed a complaint for specific restitution and unjust enrichment against the Taylors, seeking to have the property returned to him. The Taylors asserted as an affirmative defense that they “were good faith purchasers, the property had no recorded lis pendens at the time of sale,” and that Guardado had failed to post the required bonds to stay enforcement of the underlying court order. The Taylors moved for summary judgment, and the trial court denied that motion, saying there were material issues of fact as to whether they were good faith purchasers. On a later motion for reconsideration, the trial court certified the question of whether the Taylors were good faith purchasers, and the Court of Appeals granted discretionary review of that question.

The Court found that the Taylors were not bona fide purchasers, and that judgment should be entered in favor of Guardado. As an initial matter, the Court laid out Washington’s Recording Act, which states that if a “purchaser in good faith” acquires an interest in a disputed property pursuant to a trial court’s decision, the purchaser’s interest “shall not be affected by the reversal or modification of that decision.” Then, the Court found that the Taylors’ actual knowledge of Guardado’s pending appeal of the court order did not affect their status as good faith purchasers, because such knowledge would only bear on that status if the Taylors knew such judgment was obtained by fraud, which they did not. However, the Court found that the Taylors had both actual and constructive knowledge of the lis pendens, which defeats bona fide purchaser status and “is effective from the time of its filing.” Further, the Court held that the lis pendens remains effective until the time the release is recorded, rather than effectuated. Therefore, despite the fact that the lis pendens had been released prior to the closing and recording of the Taylor’s deed to the property, because the release was not recorded until after such closing/recording, the lis pendens still remained in effect during that time. Therefore, the Taylors were not bona fide purchasers under the recording act, and summary judgment for Guardado on his restitution/unjust enrichment claims was warranted.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.

Federal Update: Breakthrough Technology Rule Not So Breakthrough

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For more information about this blog post, please contact Khaled J. Klele, Ryan M. Magee, or Labinot Alexander Berlajolli.

Breakthrough Technology Rule Not So Breakthrough

86 FR 26849: Centers for Medicare & Medicaid Services (“CMS”) has, for a second time, delayed the rule that expedites the FDA approval process for breakthrough technologies for Medicare coverage until December 15, 2021. Looks like the next stop for this rule is cancellation.

HHS Issues Final Rule on Notice of Benefit and Payment Parameters for 2022 and PBM Standards

86 FR 24140: The U.S. Department of Health and Human Services (“HHS”) announced its rule that finalizes some of the standards included in the proposed rule for states, exchanges, non-federal governmental plans, issuers in the individual and small-group markets, and web brokers. This rule, among other things, furthers HHS’s efforts on health equity by lowering maximum consumer out‑of‑pocket costs by $400. In addition, this finalizes the rule for collecting prescription drug data directly from Pharmacy Benefit Managers (“PBMs”). HHS hopes that this rule will allow it to understand the cost of prescription drugs provided in exchange plans, as well as shed light on the role that PBMs play in those cost.

CMS Issues Interim Rule on Long-Term Care Facilities Regarding Vaccines

86 FR 26306: This interim final rule revises the infection control requirements that long-term care (“LTC”) facilities and intermediate care facilities for individuals with intellectual disabilities (“ICFs-IID”) must meet to participate in the Medicare and Medicaid programs. The rule aims to reduce the spread of COVID-19 by requiring education about vaccines for LTC facility residents, ICF-IID clients, and staff serving both populations, and that such vaccines, when available, be offered to all residents, clients, and staff. It also requires LTC facilities to report COVID-19 vaccination status of residents and staff to the Centers for Disease Control and Prevention (“CDC”). The rule solicits public comments on the potential application of these or other requirements to other congregate living settings over which CMS has regulatory or other oversight authority. Comments are due on July 12, 2021.

CMS Amends Rule to Conform to Bates County Memorial Hospital Decision

86 FR 24735: This interim final rule amends current CMS regulations to bring them in line with the recent US District Court decision in Bates County Memorial Hospital v. Azar, which held that Section 1886(d)(8)(E)(i) of the Social Security Act (the “Act”) requires that CMS treat qualifying hospitals as being located in the rural area for purposes of Section 1886(d) of the Act, including Medicare Geographic Classification Review Board ("MGCRB") reclassification. To put it simply, the Bates decision requires that CMS consider the rural area to be the area in which the hospital is located for the wage comparisons required for MGCRB reclassifications.

CMS Announces Continuation of Durable Medical Equipment Fee Schedule Adjustments to Resume the Transitional 50/50 Blended Rates to Provide Relief in Rural Areas and Non-Contiguous Areas

86 FR 21949: CMS announced the continuation of a Medicare interim final rule (83 FR 21912-01) and the extension of the timeline for publication of the final rule with regard to the 50/50 Blended Rates in the Durable Medical Equipment Fee Schedule for rural and non-contiguous areas. This extension will grant policy officials the opportunity to review the interim final rule while maintaining its effectiveness beyond May 11, 2021.

New York Federal Court Finds “Compelling Circumstantial Evidence” of Credit Union Mailing Sufficient for Agreement to Arbitrate

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The United States District Court, Eastern District of New York, recently found that where a credit union is able to show “compelling circumstantial evidence” that it sent an Arbitration Agreement to one of its members, such mailing is sufficient to constitute “an agreement to arbitrate” under the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, even where the member alleges that she did not receive the mailing. Filipkowski v. Bethpage Fed. Credit Union, 2021 WL 826016 (E.D.N.Y. Mar. 4, 2021). Here, a member (“Plaintiff”) of a federally chartered credit union (“Defendant”) brought a putative class action against Defendant, alleging that it wrongfully charged the class members fees relating to their checking accounts. Defendant brought a motion to compel arbitration pursuant to the FAA and an agreement between the parties. Plaintiff had previously signed a Member Agreement with Defendant which stated, among other things, that Plaintiff agreed to be bound by the terms and conditions set forth in the agreement and that if the member was notified of a change in any term of the agreement and continued to use its account after the effective date of the change, this constituted the member’s agreement to the term. Lastly, the agreement said that “written notice we give you is effective when it is deposited in the United States Mail with proper postage and addressed to your mailing address we have on file.” In October 2019, Defendant amended its Member Agreement to add an arbitration clause, which provided that claims between members and Defendant “shall, at the election of either you or us, be resolved by binding arbitration”, and that “any arbitration of a claim will be on an individual basis.” Defendant represented that it had mailed its members a copy of the Arbitration Agreement by mail along with their September 2019 account statements, allowing them to opt-out of the agreement in writing if they liked. Plaintiff stated that “to the best of [her] recollection,” she “never received a binding arbitration agreement or pamphlet . . . neither enclosed with [her] September 2019 account statement nor otherwise.” Defendant, although it had outsourced its mailings to a third-party vendor, in turn represented that an “intelligent mail barcode” contained on Plaintiff’s account statement showed that she had received all of the documents.

Defendant’s motion to compel arbitration was granted. The Court stated that New York recognizes “a presumption that a party received documents when mailed to the party’s address in accordance with regular office procedures.” The Court found that Defendant was entitled to this presumption, and that Plaintiff’s mere contention that she did not receive the documents was not sufficient to rebut this presumption. Moreover, the Court found that although Defendant had outsourced the mailing to third-party vendors, and therefore lacked “first-hand knowledge” of the mailing, Defendant’s showing of “compelling circumstantial evidence” that the agreement was mailed was sufficient to show an agreement to arbitrate under the FAA. Lastly, analyzing the broad language of the arbitration clause at issue, the Court found that the scope of the Arbitration Agreement included Plaintiff’s claims in this matter. Therefore, Defendant was entitled to compel arbitration.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.

New Jersey Update, Including Provider Immunity and New Nursing Home Laws

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As COVID-19 restrictions are being lifted on national and state levels, healthcare providers have to start considering that the immunity provided to them regarding COVID-19 may be lifted in the near future. New York already abrogated its immunity and New Jersey is starting to consider doing the same.

In addition, New Jersey has added even more reporting requirements on nursing homes, has made the process for transferring ownership more burdensome, and has increased the restrictions for a third party to manage the nursing home.

For more information about this blog post, please contact Khaled J. Klele, Ryan M. Magee, or Labinot Alexander Berlajolli.

New Jersey to Consider Ending Provider Immunity

The New Jersey Senate is considering S3731, which will end the civil immunity provided to certain healthcare professionals and healthcare facilities related to COVID-19. We will keep track of this bill as it makes its way through the legislative process.

Overhaul of Nursing Home Licensure and Reporting Requirements, Including Restrictions on Transferring Management Control

A4477, which was signed into law, revises the licensure and reporting requirements for nursing homes. Specifically, the new law adds requirements for the sale of a nursing home. Prior to transferring ownership of a nursing home, the prospective new owner must submit an application to the Department of Health (“DOH”) that meets the requirements set forth in the bill. Each transfer of ownership application shall be published on the DOH’s website and subject to a comment period of no less than 30 days. Significantly, the bill prohibits nursing homes from delegating substantial management control of its operations to a third party without prior written notice to the DOH, as set forth in the bill.

With respect to reporting, the bill requires that nursing homes report, among other things, their rates or average rates for the lease, rent, or use of land or other real property to the DOH. The DOH, as necessary, shall also identify nursing homes that may be in acute financial distress or at risk of filing for bankruptcy protection by requiring them to report, within five business days, any default in the punctual payment when due of any: (1) debt service payment, where the debt is secured by real estate or assets of the nursing home; (2) rent payment; (3) payroll; or (4) payroll tax obligation.

Conditional Veto of Hospital Wrap-Around Services

In our previous Update, we noted that the New Jersey State Assembly and Senate passed S1676, which allows hospitals to construct housing and provide wrap-around services for individuals who are homeless or housing insecure.  The Governor recently issued a conditional veto of this bill.

Opioid Antidote Prescriptions

S2323, which was signed into law, amends N.J.S.A. 24:21‑15.2. The amendment requires practitioners who prescribe an opioid drug to a patient to contemporaneously issue a prescription for an FDA‑approved opioid antidote for the reversal of an overdose, if: (a) the patient has a history of substance use disorder; (b) the prescription is greater than 90 morphine milligram equivalents daily; or (c) the patient holds a current, valid prescription for a benzodiazepine drug that is a Schedule III or Schedule IV controlled dangerous substance. The practitioner is not required to prescribe an opioid antidote more than once per year, but is permitted to do so upon the patient’s request or the practitioner’s determination that there is a clinical or practical need for the additional prescription.

Temporary Rule Waiver/Modification

53 N.J.R. 459(a):  Executive Order No. 103 (2020), and subsequent Executive Orders issued in response to the COVID‑19 pandemic, vested agency heads with the authority to temporarily waive, suspend, or modify any existing rule, where enforcement thereof would be detrimental to the public welfare during the pandemic. Pursuant to that authority, the New Jersey Department of Health is issuing this temporary rule modification, effective March 4, 2021, that waives the minimum volume requirements for existing invasive cardiac diagnostic facilities, cardiac surgical centers, and physicians practicing at these centers for the duration of the public health emergency.

Any questions regarding the temporary rule waiver should be directed to the Certificate of Need and healthcare Facility Licensure Program at CNL.InquiryWaiversIssued@doh.nj.gov.

New Jersey State Board of Pharmacy Proposed Rules

The New Jersey State Board of Pharmacy (“Board of Pharmacy”) has proposed a series of rules:

  • 53 N.J.R. 495(a) would amend the fee schedule for out‑of‑state pharmacies by increasing the application fees for permits, change of ownership/name, and change of location from $175 to $275.
  • 53 N.J.R. 496(a) would eliminate the one‑year waiting period before licensure applicants who have failed either the North American Pharmacist Licensure Examination (“NAPLEX”) or Multistate Pharmacy Jurisprudence Examination (“MPJE”) three or more times may attempt to retake the examinations.
  • 53 N.J.R. 497(a) would amend the retail pharmacy labeling requirements for an opioid medication to include a red or yellow label or sticker affixed to the container with the warning “Opioid Risk of Addiction and Overdose” written in a clearly readable black color font.
  • 53 N.J.R. 498(a) would remove the requirement that a pharmacist, at the time of dispensing, obtain the signature of a patient or caregiver that counseling was provided or refused.

Comments are due for all of the proposed rules by June 4, 2021.

New Jersey Federal Court Extends New Jersey Patient Safety Act Privilege to Near-Miss Event Involving Non-Patient Employee

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For more information about this blog post, please contact Khaled J. Klele, Ryan M. Magee, or Labinot Alexander Berlajolli.

Lawson v. Praxair, Inc., Case No. 3:16-cv-2435 (BRM)(DEA)

This case involved a Defendant’s appeal from a magistrate’s order affirming in part and reversing in part a special master’s discovery decision involving invocation of privilege under the New Jersey Patient Safety Act ("NJPSA"). The NJPSA is intended to encourage the disclosure of adverse events and near-misses that threaten the safety of patients in a healthcare facility by creating a non-punitive culture focused on improvement over blame. To effect this purpose, the NJPSA establishes an absolute privilege for (a) documents received by the Department of Health ("DOH") pursuant to a mandatory requirement or voluntary disclosure, and (b) documents developed by a healthcare facility as part of a self-critical analysis conducted regarding a preventable or near-miss event. By categorizing these documents as privileged under the NJPSA, healthcare facilities have the freedom to improve existing shortcomings without fear of those efforts being used against the healthcare facility in a subsequent civil action.

In this case, Plaintiff sued Defendants for injuries she suffered when an oxygen tank manufactured or distributed by Defendants exploded at a hospital where Plaintiff worked as a nurse. Defendants filed a third party complaint against the hospital for breach of contract and contractual indemnification pursuant to the parties’ product supply agreement. Defendants requested a special master to conduct an in-camera review of documents that the hospital claimed were privileged under the NJPSA and the special master ultimately concluded that 2,009 pages of documents produced were privileged while 33 pages were eligible for disclosure. The special master, therefore, ordered Defendants to bear 98 percent of the costs of the in-camera review.

Defendants then appealed the decision to the magistrate, who denied the appeal. The magistrate, however, granted the hospital’s appeal of the special master’s decision to order production of an email prepared during the hospital’s root cause analysis for in-camera review.

The Defendants then appealed the decision to the District Court. The District Court denied Defendants' appeal and affirmed the magistrate’s decision. The District Court held that Defendants had waived their argument that the NJPSA did not apply because Plaintiff was not a patient, as Defendants had not timely raised the argument with the special master. However, the court nevertheless affirmed the magistrate’s conclusion that the explosion was a “near-miss” that fell within the scope of the NJPSA because it could have injured patients. The District Court further affirmed the magistrate's determination that Defendants had suffered no due process violation due to the application of the NJPSA, as the privileged documents were not the only source of the information Defendants might need to prepare their case. Finally, the District Court affirmed the special master’s cost allocation, as the parties were to bear the cost of review in proportion to the percentage of documents deemed improperly withheld.

Is the Transparency Rule on Its Way Out? And Other Federal Updates

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For more information about this blog post, please contact Khaled J. Klele, Ryan M. Magee, or Labinot Alexander Berlajolli.

CMS Scales Back Part of the Transparency Rule

The Centers for Medicare & Medicaid Services ("CMS") issued its annual proposed Hospital Inpatient Prospective Payment Systems. Under the proposed rule, CMS seeks to repeal the requirement that acute care hospitals report median payer-specific negotiated rates with Medicare Advantage insurers, which was finalized in 85 FR 58432. This has created some excitement in the industry that CMS may be pulling back its transparency rules. However, at least for now, CMS is not seeking to repeal its other transparency rule, the Hospital Price Transparency Final Rule, 84 FR 65524. The Hospital Price Transparency Final Rule requires hospitals make publicly available via the internet their standard charges (including, as applicable, gross charges, payer-specific negotiated charges, de-identified minimum negotiated charges, de-identified maximum negotiated charges, and discounted cash prices) in two different ways: (1) A single machine-readable file containing a list of standard charges for all items and services provided by the hospital and (2) a consumer-friendly list of standard charges for as many of the 70 CMS-specified shoppable services that are provided by the hospital, and as many additional hospital-selected shoppable services as is necessary for a combined total of at least 300 shoppable services. In fact, CMS recently issued guidance on how acute care hospitals can comply with the Hospital Price Transparency Final Rule.

In addition, under the proposed rule, acute care hospitals that report quality data and are meaningful users of EHRs will see a net 2.8 percent increase in Medicare rates in fiscal year 2022. This means that hospitals will see an increase of about $3.4 billion in payments in fiscal year 2022.  In addition, CMS plans to extend the add-on payment for COVID-19 treatment through the end of the fiscal year in which the public health emergency ends. To further assist hospitals that suffered financially during the pandemic, CMS is seeking to halt most hospital value-based purchasing program measures during the public health emergency for COVID-19. As a result, hospitals would receive neutral payment adjustments under the value-based program in fiscal year 2022. Lastly, CMS is proposing several changes to the Inpatient Quality Reporting Program. In that regard, CMS is seeking to add five new measures, including COVID-19 vaccination rates among healthcare personnel. Comments are due by June 28, 2021.

New Guidelines Reinstate Previous Guidelines On Prescribing Buprenorphine

Before the Biden Administration took over, the Department of Health and Human Services (“HHS”) issued guidelines waiving the training and waiver requirements for prescribing buprenorphine, a drug that treats opioid addiction. Prior to this time, physicians seeking to prescribe buprenorphine outside of opioid treatment programs were required to complete an eight-hour course, and then wait several months to receive their waiver once the course was completed. When President Joe Biden took office, the guidelines were cancelled. HHS once again recently issued new guidelines on prescribing practices for buprenorphine. The new guidelines allow most healthcare providers to prescribe the drug without undergoing a separate training or having to apply for a waiver. A provider will still need to submit a notice of intent to the Substance Abuse and Mental Health Services Administration stating their intention to prescribe the drug.

Comprehensive Care for Joint Replacement Model

CMS issued a final rule, 86 FR 23496, extending the Comprehensive Care for Joint Replacement model for three performance years, from October 2021 through December 2024. Numerous changes were made including the payment methodology, revising the episode definition as well as others to reverse early results from when the model was created regarding the model’s ability to achieve savings while sustaining quality. As part of the changes, CMS is excluding rural and low-volume hospitals in the 34 mandatory Metropolitan Statistical Areas (MSAs) and any voluntary hospitals in the 33 voluntary MSAs that had initially opted into the model for performance years 3 through 5.  CMS issued a fact sheet explaining the changes to the model. The rule is effective July 2, 2021.

HHS to Cover COVID-19 Vaccine Administration Costs

HHS recently announced that it will reimburse providers for administering COVID-19 vaccines to underinsured and uninsured patients. The COVID-19 Coverage Assistance Fund ("CAF"), will cover the costs of vaccine administration for providers treating patients enrolled in health plans that either do not cover vaccination fees or cover them with patient cost-sharing.

New York Court Finds “Occasional Forays” by True Owner is Insufficient to Defeat Adverse Possession Claim

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The New York Supreme Court, Nassau County, recently dismissed a motion to quiet title, finding that “occasional forays” by a true owner is insufficient to defeat the exclusivity element of an adverse possession claim where the adverse possessor has alone cared for or improved the  property as if it were their own. See Strenger v. Gellman, 609487/2020 (N.Y. Sup. Ct. Feb. 2, 2021). In the case, adjoining property owners disputed ownership of a 24 foot by 3 foot piece of land located in the rear of their respective properties.  Plaintiffs sought to replace a fence that was located on the disputed property and extended three feet inside the plaintiffs’ property. However, defendants claimed that the existing fence was located on the property line because defendants acquired title to the disputed property by virtue of adverse possession. Defendants alleged that they had exclusive use of the disputed strip since 1997, during which time defendants erected a playhouse that remained until 2014, and later used the disputed property as a vegetable garden and a play area for their children. Conversely, plaintiffs claimed that they had total access to the disputed property by means of the gate and that the property was used by plaintiffs to access, among other things, plaintiffs’ central air conditioning unit and sprinkler valve control box, which the former owners installed in 1993. Plaintiffs moved to quiet title and enjoin defendants from asserting rights or title to the disputed property, and defendants cross-moved for a declaratory judgment granting them ownership of the property.

The Court denied both parties’ motions. First, the Court noted that “[t]o establish a claim for adverse possession, a party must demonstrate: (1) hostile possession, (2) under a claim of right, (3) actual, open and notorious, exclusive and continuous for the statutory period of 10 years” by “clear and convincing evidence[.]” Moreover, since the adverse possession claim was not based upon a written instrument and title allegedly vested in 2007, prior to the amendments to the Real Property Actions and Proceedings Law,  the defendants were required to show that the parcel was either “‘usually cultivated or improved’ or ‘protected by a substantial enclosure[.]’” Here, the Court found that plaintiffs could not defeat the exclusivity element for an adverse possession claim because plaintiffs’ central air conditioning unit and sprinkler valve control box were not located on the disputed property and maintenance of such did not require access to the disputed property. Moreover, the Court found that even if plaintiffs occasionally accessed the disputed property, “occasional forays” by the true owner is insufficient to defeat the exclusivity element “where the party claiming title by adverse possession has alone cared for or improved the disputed property as if it were his or her own.” Similarly, the Court found that defendants failed to demonstrate as a matter of law that they acquired title to the disputed property via adverse possession. Google Earth images of defendants’ property from 2012 and 2013 did not reveal a playhouse on the property, as alleged by defendants, and the pictures submitted by defendants in support of their motion were undated.  Nevertheless, even if defendants established their presence in the disputed property during the time in question, “the area acquired by adverse possession [was] limited to the area actually occupied and possessed, and neither the playhouse nor the garden [were] alleged to take up the entire Disputed Area.” Accordingly, the Court denied both motions.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.

Arizona Appellate Court Holds Insured May Settle a Third-Party Claim When Insurer Defends Under a Reservation of Rights

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The Court of Appeals for Arizona, Division 1, recently held that in the title insurance context, when an insurer agrees to defend its insured against a third party but reserves the right to challenge coverage, the insured may independently settle with the third-party claimant without violating the insured’s duty of cooperation under the insurance contract. Fid. Nat'l Title Ins. Co. v. Osborn III Partners LLC, 483 P.3d 237 (Ariz. Ct. App. 2021). In 2006, a Mortgagee loaned a developer $41.4 million to fund the construction of a condominium complex, and secured the loan by a deed of trust in order to ensure the priority of its security interest, including over later-recorded mechanics liens. Mortgagee suffered financial problems, resulting in its cutting off of funding to the developer, and later, in an involuntary bankruptcy proceeding and attendant restructuring. Over the course of the bankruptcy, Mortgagee’s interest in the loan was transferred to Successors, including Defendant, and ML Manager was created to manage Successors as well as the restructuring of the original mortgagee. Meanwhile, the developer had hired a general contractor for the construction on the project but had stopped paying them (in part because Mortgagee had cut off funding), leading to a filing of mechanics’ liens against the property by the contractor and its subcontractors seeking payment for completed but unpaid work. Developer and some of these contractors then filed a lien foreclosure action in Superior Court, asserting that their mechanics’ liens had priority over the original deed of trust. Defendant’s title insurer accepted the defense of this action on behalf of Successors but did so under a reservation of rights. After the sale of the underlying property by ML Manager pursuant to a trustee’s sale, ML Manager, on behalf of Successors, and Developer agreed to settle the lien priority case. This agreement was known as a Morris agreement, named after the Arizona Supreme Court case United Services Automobile Ass’n vs. Morris, which held that in the liability insurance context, an insured may settle a third-party claim while being defended under a reservation of rights. 751 P.2d 246 (1987). The Title Insurer objected to approval of the settlement in Bankruptcy Court and intervened in the lien priority case itself, arguing (1) that Morris did not apply to title insurance and (2) that notwithstanding Defendant’s ability to settle the case with the Developer, it was not covered under the insurance policy. The trial court entered judgment for Defendant, holding that Morris indeed applies to title insurance, and that Defendants were also covered under the title insurance policy. The title insurer appealed, and the appellate court affirmed in part and reversed in part.

The Court first affirmed the trial court’s finding that Morris is applicable in the title context. The Court found that Morris recognizes the tension between an insurer’s interest in not wishing to pay a third-party claim as well as the insured’s interest in protecting itself financially, especially when the insurer has not yet accepted full responsibility for a particular claim. These underlying principles, the Court found, were equally applicable to title insurance as liability; although title insurance insures a different kind of risk, the ultimate scenario Morris was intended to mitigate against, a completely uncovered loss, was equally applicable. The Court also noted that under Morris, an insured is still required to provide notice to its insurer before entering into a settlement agreement, allowing the insurer to potentially withdraw its reservation of rights and retain full control over the litigation, and that the ultimate settlement must be reasonable. This, the Court found, balances the rights of the insurer and insured and prevents the insurer from “hamstring[ing] the insured’s ability to negotiate a settlement even though it ha[d] not accepted full responsibility for the insured’s loss.” After making this finding, however, the Court found that as it pertained to this fact pattern, the trial court had erred in finding coverage under the policy and entering a judgment in favor of Defendant. It found that the original Mortgagee’s cutting off of funding to Developer had led to the mechanics’ liens that had later arisen, and therefore, coverage was barred by exclusion 3(a), liens “suffered by” the Insured. As a result, the Court affirmed the trial court’s rulings as it pertained to Morris, but reversed its coverage determination and the resulting judgment in favor of the Successors.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.

New OIG Advisory Opinion on Ambulatory Surgery Centers and the One-Third Test

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For more information about this blog post, please contact Khaled J. Klele, Ryan M. Magee, or Labinot Alexander Berlajolli.

On April 29, 2021, the Health and Human Services Office of Inspector General ("OIG") issued Advisory Opinion 21-02. The Advisory Opinion addresses a proposed arrangement involving a health system, certain orthopedic surgeons and neurosurgeons employed by that health system, and a management company seeking to invest in an ambulatory surgery center ("ASC"). The proposed arrangement would allow the health system to own 46%, the surgeon investors to own 46%, and the third-party management company to own the remaining 8% of the new ASC. The primary issue raised by the opinion is whether or not the proposed arrangement would violate the federal anti-kickback statute ("AKS") such that sanctions and/or monetary penalties could be imposed.

The AKS makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce, or in return for, the referral of an individual to a person for the furnishing of, or arranging for the furnishing of, any item or service reimbursable under a federal healthcare program. However, the AKS also contains a safe harbor provision (“Safe Harbor”) that removes certain circumstances and conduct from the scope of the AKS. For example, the Safe Harbor protects payments of investment returns by an ASC to owners who refer patients to the ASC. Under that scenario, the Safe Harbor typically protects physician investors who have derived at least one-third (1/3) of their medical practice income from the performance of procedures that will be reimbursed by Medicare if performed in the ASC for the previous fiscal year or 12-month period (“1/3 Test”).

Even though some of the surgeon investors could not meet the 1/3 Test, the OIG concluded that the proposed arrangement was at a sufficiently low risk of running afoul of the AKS and that OIG would not impose administrative sanctions on the health system or management company in connection with the proposed arrangement. OIG emphasized the following points, largely based on a certification submitted by the health system, in reaching its determination:

  • Although one or more of the neurosurgeon investors would fail to meet the Safe Harbor 1/3 Test, the surgeon investors would use the new ASC on a regular basis as part of their medical practices;
  • The surgeon investors would rarely refer patients to each other for ASC procedures;
  • Each physician investor would personally perform almost all ASC qualified procedures that he or she refers to the ASC;
  • The proposed arrangement would contain certain safeguards to reduce the risk that the health system would make or influence referrals to the new ASC or the surgeon investors, such as fair market compensation and non-tracking of referrals;
  • The proposed arrangement would include policies that do not award investors who serve as referral sources for the ASC;
  • Certain safeguards would reduce the risk that the investors would receive profit distributions for referrals of patients to the ASC;
  • Certain safeguards would reduce the risk of fraud and abuse by treating patients receiving medical benefits or assistance under any federal healthcare program in a nondiscriminatory manner.

Among the points relied upon above, perhaps most noteworthy is the fact that the OIG permitted surgeon investors who did not pass the 1/3 Test to proceed on the basis that they would use the ASC on a “regular basis” as part of their medical practices. Additionally, the health system’s representations that surgeon investors would perform nearly all of their own referred procedures was highly significant to OIG’s analysis.

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