Court Holds the ACA and Implementing Regulations Do Not Preempt State Creditor Priority Laws in Reinsurance Debt Dispute

Carlton Fields

Carlton Fields

In 2016, Colorado Health Insurance Cooperative Inc. was ordered into liquidation by a Colorado court. At the time, the federal government owed Colorado Health $24.5 million for reinsurance debts under the Affordable Care Act (ACA), while Colorado Health owed the federal government $42 million for risk adjustment debts pursuant to another program promulgated under the ACA. The government attempted to “leapfrog” other insolvency creditors by offsetting the amounts Colorado Health owed under one ACA program against the amounts the federal government owed the Colorado Health estate under the other federal program, rather than paying its debt to the estate in full and making a claim against the estate as an insolvency creditor. The trustee sued, and the U.S. Court of Federal Claims ordered the government to pay.

The U.S. Court of Appeals for the Federal Circuit affirmed. The court analyzed the explicit statutory and regulatory language and the structure and purpose of the federal scheme erected by the ACA and implementing regulations. The court found that, with specific regard to the prioritization of insolvency creditors, the text of the statutes and regulations was silent. The court also found that the structure of the law suggested that state law controlled creditor priority, and further that the purposes of the law did not evidence a preemptive intent that was otherwise absent from the text and structure of the federal scheme. As such, the federal scheme, collectively, did not demonstrate a “clear and manifest” intent to preempt state law fixing creditors’ rights during insolvency.

Therefore, applying the presumption against preemption, the court held that the federal scheme did not preempt Colorado’s creditor priority framework, and the federal government could not offset the amounts that were owed to it by Colorado Health rather than paying its debt to the estate and making a claim for the amounts it was owed, just as any other creditor would be required to do. 

Conway v. United States, No. 1:18-cv-01623 (Fed. Cir. May 17, 2021).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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