Good afternoon Judge Gourth is joining us by video. Good afternoon Leonard. Good afternoon Judge Rendell and Nesty. We are pleased to have sitting with us today from the district court, the Eastern District of Pennsylvania Judge John Padova. We had a panel of a couple months ago and we can't seem to let go. We continue this argument having gotten supplemental submission so we'll now hear argument in the case of UPMC St. Margaret versus Levitt and UPMC Braddock hospital versus Levitt. Council. Thank you, Your Honours. May I please the court Samuel Braver on behalf of the Appellants and I have reserved two minutes of rebuttal time and I'm going to spend my time most of my time dealing with UPMC Braddock. All right. Your Honours, there are five specific reasons why the Einstein recent decision and Einstein of this court of similar issues doesn't apply. What was there are five specific factors that the Einstein panel found to be critical which were present in the statutory merger in the Einstein case, none of which are in the UPMC Braddock case and all of which would indicate that what we do have whether you call to sale under the secretaries approach or the statutory merger which it was, Your Honours, we have a bonafide transaction of which you will, I hope to show in my argument where there was consideration of fair market value of relatively equal dollars. First, let me go back. The administrator only looked at the 13 million in land and depreciable assets that it seems now is considered as really three and found that the numbers were so far apart. The minister never really looked at the, never really probed the cash or current assets nor did it really consider the foundation commitment and the value of those. Is that correct? That is correct to a point you're on, although the district court judge in the firm has addressed the issue and has been briefed by both sides and I'm going to show that is what you, their acknowledgement of their 400 percent error and valuation which is when they considered what we now concede is the fair market value of the physical property. Right, the 13 versus the three. Right, so now that it's $10 million which was a 400 percent error they've acknowledged. The other issue which I will now address goes to the foundation money which they've indicated that, well, that was part of the transaction, that was their money. In the Einstein case, your honors or the panel's decision there was when you have limited use funds, funds that are restricted, that are not the providers of funds, you can't count that because they don't have control or as the Einstein panel said, you can't get your, it's not necessary cash, you can't do what you want to do with it. What we have here in the record is, is very complete on it, is that these funds were under the control of the foundation. The foundation was not merged into UPMC Bratwick. The foundation had it, was it non-for-profit, independent board, that what it did was make an effect, a gratuitous promise, same purpose, same mission, they supported the provider before the merger, they agreed to support it after. And the provision here, I'm looking at Pendex 592, talks about the distributions shall be at such time in such manner as the foundation in its discretion determined. Soul discretion. Soul discretion. So you would say that's restricted as per that agreement and therefore cannot be counted at $3 million. Cannot should not because the test would be whether or not the foundation, despite having made a representation that it would support the hospital
. It was up to them whether or not because it was in their discretion on request made by UPMC Bratwick for them to decide whether they wanted. So when you take what is now the $10 million of the year, the $3 million out of it, you have $13.2 million of assets made up of the $3 million. Mr. Brewer. I'm sorry, Mr. Brewer. Yes, sir. In Einstein, Chuck Slover did state as you did, but gave a $1 million discount off the grant and only credited the grant up to $1 million. Exclusive of that $1 million. What do you propose we do with the foundation monies? We can't say that all 3 million of them are excluded, can we? Well, the answer, I believe, your honor is you can and you should, but because it is controlled by the foundation, it wasn't the merge, the new entities' money. They had, if they made a reasonable request and it was honored, they would get it. Even under that consideration, let's assume that you discounted it and I disagree with the Einstein's panel, but that decision is what it is. Even if you do that, what you then have is a relatively minor discrepancy in value. We have liabilities that was the consideration of a return of 12.9 million plus. Balance that against even if, let's say you give it half of that value, you're at $13.4. It's basically $1 for $1 and a very ravaged thing, then market, healthcare and Braddock. So those are the two. How would we determine, Mr. Graver? How would we determine how much of that $3 million might be instrumental in that matter? Isn't that the sort of thing that we would normally send back to the district court and say, give us what the value of this is that we can add to the assets and then subtract the liabilities and see what the result is. Isn't that the appropriate way to handle it? That would be an approach, Judge Garth, that you obviously could do, but I don't think it would be the appropriate approach. The district court just bought into the argument, the magistrate Judge Mitchell just bought into the $3 million, didn't give any analysis. The administrator never questioned it. Here we have very clearly a $3 million issue that funds that belonged to the foundation. They didn't belong to the provider. So I don't believe that it would be a prudent use of the district court's time, nor do I believe that it would be the appropriate remedy here to send it back for the magistrate Judge to make that decision
. These funds very clearly are limited use funds that did not belong to the provider. That could be an approach. What about the, oh, excuse me, Leonard, did you ever follow up? I have one, yes, I have one more question, Judge Rendell. If you're right, Mr. Brewer, and that it would not be feasible or appropriate to remand it to the district court for that. And if you're also right, and I'm not suggesting you are, this court should hold that this is a bona fide transaction, wouldn't we have, be obliged in any event to remand this to the district court for the determination of relatedness? And if we did that, why shouldn't the district court tackle both jobs? The Judge Garth, you're right that the district court did not deal with the related party issue. I believe that it is very, and you could send it back. I don't believe that it's necessary because as a matter of law, I believe that the law on related parties is very clear. We have a tense circuit, a public court decision and it would be a Christie. But the law is, well, the one circuit court decision, but it's diametrically opposed to the secretary's interpretation. So I don't think we have much clarity here. Who should decide that issue? Should we decide it or should the district court decide it? You're on it, I believe you should decide it. The secret to, it's been fully briefed. The issues are very frame, very clearly relative to the related party, which I can deal with right now, but there are two. Let me just deal with. You have one other little hanging chat here on the first argument, which is the current assets, the $10 million. I'm assuming you're going to want to poke at that valuation as well. I will. What we have, the discrepancy between the values, when you take out the limited use funds, $3 million and you give the acknowledgement of their blatant there of the 10, we're down to 13.3 versus 12.9. That's the, that's so it's basically dollar for dollar. Well, we don't have the large discrepancy, which was viewed to be a critical factor by the Einstein panel. We don't have the large discrepancy that's in the program memorandum of 2000 that generated all of this interest. We have basically, you're down to, the secretary can't have it both ways. They can't say that, well, we did make it a 400 percent value loss. That's immaterial. And then to say that our difference between 13
.3 and 12.9, which is an appraised value, a fair market value, that's 400,000 is immaterial. How about the negotiation? I mean, the, the, the test, the bona fide test is not just valuation. It is also arm's length negotiated transaction. What is there in the record to support that? This record is filled with evidence supporting the fact that this was a, the best and only offer, which an Einstein, the court found to be critical. And I'm going to give up my rebuttal time because I will, if that's the case, I'm going to let you go a little bit more. This is an important case. So why don't we add five minutes? Thank you. Thank you. And we'll do the same for your colleagues. Thank you, Judge Rendell. In the, in the Einstein decision, what was viewed to be critical was that the, in Einstein, there was an offer passed up that would have provided almost $27 million of gain, tens of million dollars of gain gave that up. And that was a factor that was used to be substantial evidence supporting whether or not it was bona fide. We don't have that here. What we have is six years of history of going out, trying to set this up as a joint venture didn't work, sent out seven RFPs, including one leading up to the one the UPMC, the UPMC stepped in, nobody wanted to touch this hospital. They were, and that's in the record. It's in the affidavit of Tom Boyle, which has been, was stipulated that was, that's an accurate representation of history. So what you have is a hospital that doesn't have anything more than $13 million of assets at a fair market value. And you've got liabilities that need to be paid of $12.9 million. So you basically have $1 for dollar. The, we had independent legal advice. We had separate accounting, separate council, and this led to the only, it was the only offer on the table. That's, that's, that's arms like nobody else wanted to touch this. And you got somebody stepping up to say, we're going to take it on basically dollar for dollar. Mr. Praver. Yes sir
. I have another question. Our standard of review here is to defer to the secretary. Is that not so? Your standard of review is clear. Yes, if it is, if it is an issue where there, where the regulations are clear and the, in this case, I think, I take it that they've created an ambiguity, but yes, you defer absent. All right. There's a reasonable interpretation. I think there's a reasonable interpretation. Right. If the secretary's interpretation is reasonable, we defer. Okay. Okay. Now the secretary has to have substantial evidence to support the conclusion that it reaches. Is that not so? That's the standard. My evidence that the secretary have here to hold, to hold for the against a bona fide obligation of bona fide transaction. Judge Gris, was there any evidence? In substantial at best, I take the position, is set forth in our papers that the whole entire program memorandum was nothing more than an effort to close a loophole that they didn't close back in 1996 when they changed the regulation. They do not want to pay out recapture law. It's very clear what they did. I asked you, Mr. Praver, forgive me. I asked you what evidence the secretary had on which we could say that there was substantial evidence which was reasonable to which we should defer. The secretary first tried, I don't think they have substantial evidence that a reason of mine would accept supporting it. They tried first to base it upon the large discrepancy which they backed off off when they made the 400 percent error. They based it on what they thought was $3 million or $3 million foundation money as being a basis to show, well, there's a discrepancy. It wasn't the merging entities money. So those two were almost 420 percent of error and value. So they didn't have that. They tried to show that there wasn't any, they tried to base it on the fact that you didn't go out there and look for another taker. We had, that was insubstantial and it wasn't supported in the record
. We had seven RFPs that weren't accepted. We have an issue relative to whether this was the only offer on the table. The issue is when the secretary's interpretation of which they didn't have a basis here, which they lack substantial evidence, did the word spread. That's part of this arms-length transaction. Well, the word spread, we took it on ourselves to go out and solicit RFPs. What we have here, Judge Garth, is a record as it relates to arms-length transaction. The only part about the fact that the secretary made a big point and showed the district court that there had been no appraisal made initially and before the transaction took place. There was no, there's no, that is not evidence on which they can relate to anything in the, in the record or the regulations. There's no requirements. You need to have an appraisal before a transaction. What we did is we obtained an appraisal not beforehand, but we got one after. No issue relative raised as to what whether or not the fair market values were in any way unreasonable or not supported. In fact, they accept the appraisal value. So the secretary on this record as it relates to arms-length transaction, the five Einstein factors that the Einstein panel, the third circuit found to be relevant, whether or not there was a discrepancy in the valuation, whether or not you left offers on the table, whether or not you structured this in order to gain recapture, whether or not you acted in the best interest of the Marzenity. None of those are present on this record. So I would submit and I'm arguing Judge Garth that the secretary abused its discretion, the district court abused its discretion. There is no substantial evidence in this record on which they can support the Bonapoi Arms-length transaction of which a reasonable mine would accept. It doesn't exist. We go to the related part of the- Why is the relatedness issue? Why is there interpretation unreasonable? The interpretation is unreasonable, at least three reasons. If you look at what was the regulation that they're relying on, this is the A0076 which is very clearly set forth in the record. They give you two examples. Let's assume for purpose- What's the language itself? The language says this and we're looking at whether or not significant control and influence. It says the term significant as used in this program memorandum, as the same meaning as the term significant or significantly in the regulations. Was there a significant relationship such as you could exert influence or control or be controlled by the other entity? But you're arguing that it's a before-relatedness. I'm arguing it's before but I'm- No question. The language is very clear. It says whether the parties were related that went into the transaction. The Eucharist was the 10th Circuit case, says it best, but I'm not saying anything different
. You're saying- And let's use A and B. We've got A and B that merge into the become C. You're arguing that A and B have to be unrelated. Well, A and B, you look at whether A and B are related at the time of the merger. But even assuming that they're right that it's A and C or B and C, you're saying there was no control. That's correct. Even under their interpretation. Even under their interpretation, there's no substantial evidence that two examples that they give in the program memorandum that the secretary relies on four years after this transaction, which in and of itself is unreasonable. Before years after the transaction, this is why I go back to say when they tried to change the balance budget act in 96, they basically take away recapture, which is fine. Congress can do that. They missed this issue so they'll not only come back in 2000 when they see that all these recapture losses. The regulation says that you can have a statutory merger and you look to the state law whether or not the merger is appropriate. Well, you can't have an emergent situation after the merger takes place and there isn't an issue. In fact, they stipulated that it was appropriate under Pennsylvania law. Speaking on the mic, please. I'm sorry. I'm sorry. You can't have a merger under Pennsylvania law or any states law. The Pennsylvania is the key one here where the entity that merged into still exists. It's gone. It evaporated. It can't control anything. So what they did was, as I say, as part of the facade, they came up with this test. Well, if you have carryover, then you have this continuity. It's it's it's it's it's it's it's it would require that you have some kind of foreign people coming in taking over the corporation once it's murdered. Well, I'll see you mess. I mean, you can't it. And actually you can't get there
. Metaphysically, you might be able to get there. All right. We'll hear from you. We'll hear from you. One rebuttal. All right. Judge Gaurav here. Another question. Okay. Yeah. On the related niche issue. Are there not facts as to the affiliations as to the implications as to the actions that the board of directors had taken, which would bear upon whether or not there was a relatedness factor. And as I understand it, both the bona fide transaction and the relatedness must be satisfied in order for you to succeed. Am I correct? That's that's correct. Yeah. Well, shouldn't the district court be the one to determine what the effect of the board of directors was whether or not there was a relatedness factor that's that was present? No. No. For this reason. We only had six carryover directors go from the old entity. That of 18. They even if they voted as a block, they controlled nothing. We have a record with it. There is absolutely no evidence. And we put it in that these directors negotiated at arm's length. They for this court descended back on the on it is so clear in this record that there is no evidence of they put nothing in. Presumably. I was going to say they had their shot at putting in whatever evidence there was be. I would assume we wouldn't have the district court take more evidence
. No, it would be it would be inappropriate. I think to take new evidence because the district court has to deal with the record that exists when it comes up. And they put in nothing. There is no evidence that they put in other than their position paper. Their program memorandum that they rely on for relatedness. And this is why I would not send it back. Provides two examples. Example one, where 50% of the members come over. And they have 50% control. That's you can make the argument that might be reasonable. Or they have another one where there's almost 48%. We only have one third and you've got to make jump in intellectual reasoning that each one of these directors, even though they couldn't control anything, breastified Duturity to an independent organization to say I don't care about you new entity. I'm going to vote and consider the former corporation that doesn't exist anymore. There's nothing on this record to consider. Judge Gareth, anything further? No, no. All right, thank you. We'll hear from you. Or my bottle, Mr. Grader. Thank you. It's up to your co-counsel. May it please the court. I'd like to begin with a question that Judge Arfield. State your name, please. I apologize. Joel McElvane for the Epoly. I'd like to begin with the question that Judge Gareth asked a few minutes ago, which was what was the evidence for the bona fide sale finding of the administrator? And I'll focus most of my argument on Braddock, just as a Pellens Council did, although of course I'm available for questions in either case. There's ample evidence in the record that there was no bona fide sale of the Braddock assets
. And to take a step back for a moment, the question is the standard, of course, is substantial evidence of the question of substantial evidence for what? And that is substantial evidence for the legal standard, which is, was there an arms length transaction in which the parties were attempting to negotiate reasonable consideration and in which reasonable consideration actually was exchanged? That's C.I.N. Stein case. That's a program at memorandum A-SEL. Okay, and what's in the record to support your position that there were no arms length negotiations? We have Mr. Boyle saying that they had legal counsel extensive contract negotiations to place leading up to the merger agreement and merger. We have the RFPs. What is there to support your view that this did not occur? Extensive contract negotiations, but negotiations over what? They were negotiating over the staffing of the board. Do you use that in the record that the negotiations were not of the kind that should matter here? There's absolutely no indication that they were negotiating over compensation. Do you have appendix references to tell us where in the record? Well, it's, on this specific point, it's a negative point. They say there were extensive negotiations, but then the sense ends. There were extensive negotiations period, but then if you look at what the negotiations actually were, I'm saying, where in the record? They're not claiming that there were negotiations over price. In fact, I suppose you could ask a panelist counsel, but I think that you would consider that. Why don't you think the regulations say the negotiations have to be over price? They say that arms length with negotiations then ending up with a fair equivalent value. No, arms less than negotiations where you're attempting to get reasonable consideration. And if you're not motivated to get to get these from the consultation. You're reading something into this that isn't apparent to me. I guess I'm asking you where in the record does it say that although there were extensive contract negotiations, they had nothing to do with price. Their motivation was not to seek reasonable compensation. It was to continue the hospital's mission. That's at page 237 of the appendix. Their motivation was, okay, I have 237 of the appendix. Where there's paragraphs on there. This is Boyle's affidavit, 230s. paragraph 21 describes the motivations of the parties and says that the merger would enable them to achieve their charitable purposes, allow them to develop enhanced clinical capabilities, permitted efficient and cost effective rationalization health care services, restraining increases in the cost of services and support increased managed care opportunities. I don't think that's not mentioned there of a motive to seek a fair price. Well, that doesn't say what their, this says what their goal was in the merger
. It doesn't say what the negotiations were about. Right, but it was the, the providers burdened before the administrators but put forth evidence that they were seeking a bona fide sale and they put forth absolutely no evidence that they were seeking to an exchange of a fair price whatsoever. Further, as further evidence of that, they didn't seek an appraisal before the merger. You would think if somebody really was trying to divorce themselves of their assets, put them out to the world, get rid of them and get a price gap. You might be afraid of what it comes up with. I mean, they had hardly any cash. They had receivables, you know, 5.3 million in receivable. Somebody might have come in and said they're worth nothing. The receiving party, I apologize, I didn't know. You really want to see what somebody's going to pay and when you get, you know, willingness for somebody to assume your liabilities and you look at your balance sheet and you say, you know, my assets might not support them if we had an appraisal. I mean, but you would think that the receiving party would be interested in finding out what they're buying too. Neither the buying party or the selling party, supposed buying party, supposed selling party, showed any interest in what the actual value of what being exchanged, what was being exchanged. Well, if the receiving party says we're going to pay 12.9 million in liabilities, I'm assuming they're going to think that they're, they're getting something. I don't know. I would assume exactly the opposite since they're giving up 13.3 million dollars in cash assets, which means they're getting nothing for their non cash assets. And that's the mac. That's the mac. It's the mac. Oh, yes, sir. Isn't this a vastly different situation than the one in Einstein where that was made very patent that they were seeking to get a Medicare deduction in Einstein, whereas here, Braddock wanted just to have credibility in the health field. I don't know. There was nothing said about. There was nothing that was ever announced or expressed with respect to the very loss that they're seeking. To be clear, we don't think that the merger itself was a bad faith transaction. We don't dispute that they had a good reason to merge and to continue on with their mission in a new form. So that's not the question. We're not saying that the sham transaction any form, but the relevant question is it was not the sort of transaction that allows you to calculate the value of the assets that were supposedly exchanged and therefore allows you to recalculate the depreciation that they might be owed. So even though the your position, is it your position that there must be an exact equation between the assets that are sold and the liabilities that are assumed? So that in each instance, in this instance here, there would have been 13 million of the assets sold and 13 million of the liabilities that were assumed by the surviving corporation. Is that your position? I don't contend that there has to be an exact match, but there has to be one factor in looking as to whether there wasn't in fact an attempt to gain reasonable consideration is was there in fact reasonable consideration? And one factor. There's $400,000 as I figure it between the assets sold and the liabilities is assumed. That's without taking into account the foundation's discretionary fund. Am I correct in that, sir? If I would disagree with the characterization of discretionary fund and I'd like to speak more to that to a second, but you have no, but what about the $400,000 and let's take one thing at a time. Certainly. Is there approximately a $400,000 difference? 400 percent, I think you mean, Leonard? 400 percent? Or is it 400,000? I believe he means 400. I think it was $400,000. You're right. 400,000. Does that disqualify this from being a bona fide transaction? If that's what we had, now I realize there's a 500 pound elephant out in the woods there, which is the $3 million foundation grant. I don't want to deal with that at the moment. Does the $400,000 difference make this a non-bonafide transaction? Yes, and here's why. They gave up $13.3 million. I didn't hear you. Yes, sure. Yes, that difference makes it a non-bonafide sale, not a non-bonafide transaction, but a non-bonafide sale. Here's why. They gave up $13.3 million in monetary assets, including the foundation funds, and we can speak more about that. In the opposite exchange for giving up the $13.3 million in monetary assets, their supposed consideration for that was also giving up $12.9 million in liabilities. So they're behind the game just if you look at the cash alone. So once you realize that point, the value of the non-monetary assets, whether it's $3 million or $13 million or any other figure, is simply irrelevant
. So that's not the question. We're not saying that the sham transaction any form, but the relevant question is it was not the sort of transaction that allows you to calculate the value of the assets that were supposedly exchanged and therefore allows you to recalculate the depreciation that they might be owed. So even though the your position, is it your position that there must be an exact equation between the assets that are sold and the liabilities that are assumed? So that in each instance, in this instance here, there would have been 13 million of the assets sold and 13 million of the liabilities that were assumed by the surviving corporation. Is that your position? I don't contend that there has to be an exact match, but there has to be one factor in looking as to whether there wasn't in fact an attempt to gain reasonable consideration is was there in fact reasonable consideration? And one factor. There's $400,000 as I figure it between the assets sold and the liabilities is assumed. That's without taking into account the foundation's discretionary fund. Am I correct in that, sir? If I would disagree with the characterization of discretionary fund and I'd like to speak more to that to a second, but you have no, but what about the $400,000 and let's take one thing at a time. Certainly. Is there approximately a $400,000 difference? 400 percent, I think you mean, Leonard? 400 percent? Or is it 400,000? I believe he means 400. I think it was $400,000. You're right. 400,000. Does that disqualify this from being a bona fide transaction? If that's what we had, now I realize there's a 500 pound elephant out in the woods there, which is the $3 million foundation grant. I don't want to deal with that at the moment. Does the $400,000 difference make this a non-bonafide transaction? Yes, and here's why. They gave up $13.3 million. I didn't hear you. Yes, sure. Yes, that difference makes it a non-bonafide sale, not a non-bonafide transaction, but a non-bonafide sale. Here's why. They gave up $13.3 million in monetary assets, including the foundation funds, and we can speak more about that. In the opposite exchange for giving up the $13.3 million in monetary assets, their supposed consideration for that was also giving up $12.9 million in liabilities. So they're behind the game just if you look at the cash alone. So once you realize that point, the value of the non-monetary assets, whether it's $3 million or $13 million or any other figure, is simply irrelevant. Whatever the leader or appraisal might come up for that, they didn't know the value at the time. Whatever a leader or appraisal might come up with a figure for those numbers at some later point in time is irrelevant. And the support for that is program memorandum A-76 itself, which directly tells you that if you've given up more in cash than you've gained in the supposed consideration of giving up your liabilities, that in and of itself is conclusive proof that you do not have a bona fide sale. That's the equivalent of giving up your other assets, whatever they are for zero, and giving it up for zero is not a sale. It's a donation. And the regulations are very clear that the donations do not result in a readjustment of your depreciation. If you're a matter of question. Earlier you told the panel that it did not have to be an exact equation between the asset sold and the liabilities are sold. Correct. I asked you whether the $100,000 difference here was material and determining whether this was an arms later bona fide transaction. That $400,000 is enough to throw it over into one that is not bona fide. What is the difference that you espouse here, that you advocate here for not equating the two and for determining what the result should be as to a bona fide obligate? Because that $400,000 difference is just the difference comparing money against money. It's before you even get to the depreciable assets. You don't know the value of those depreciable assets at the time of the merger because you haven't had an appraisal at the time. You're just guessing that some figure may come up later. When I said that there doesn't have to be an exact equivalence, perhaps if I could provide an example, a very different case from the case here. We had two parties that really were negotiating over price and really were operating at arms length. The selling party really was going to divorce itself from the management of the hospital after the fact. All those facts are in place and they negotiate and they arrive at a figure of say $90 million that a later appraisal might show was $95 million or something like that. The fact that there's a minor difference in that appraisal in that circumstance where there really were negotiations over price wouldn't defeat the fact that there was a bona fide sale. You're percentage here, 13.3. 12.9 is not different from your 90 versus 95. Now you're getting down to, you're not talking about value, you're talking about negotiation. I am talking about negotiation. That's a very central point. Your answer before, as to the $400,000 that it automatically makes it non-bonafide, makes no sense based on what you just said
. Whatever the leader or appraisal might come up for that, they didn't know the value at the time. Whatever a leader or appraisal might come up with a figure for those numbers at some later point in time is irrelevant. And the support for that is program memorandum A-76 itself, which directly tells you that if you've given up more in cash than you've gained in the supposed consideration of giving up your liabilities, that in and of itself is conclusive proof that you do not have a bona fide sale. That's the equivalent of giving up your other assets, whatever they are for zero, and giving it up for zero is not a sale. It's a donation. And the regulations are very clear that the donations do not result in a readjustment of your depreciation. If you're a matter of question. Earlier you told the panel that it did not have to be an exact equation between the asset sold and the liabilities are sold. Correct. I asked you whether the $100,000 difference here was material and determining whether this was an arms later bona fide transaction. That $400,000 is enough to throw it over into one that is not bona fide. What is the difference that you espouse here, that you advocate here for not equating the two and for determining what the result should be as to a bona fide obligate? Because that $400,000 difference is just the difference comparing money against money. It's before you even get to the depreciable assets. You don't know the value of those depreciable assets at the time of the merger because you haven't had an appraisal at the time. You're just guessing that some figure may come up later. When I said that there doesn't have to be an exact equivalence, perhaps if I could provide an example, a very different case from the case here. We had two parties that really were negotiating over price and really were operating at arms length. The selling party really was going to divorce itself from the management of the hospital after the fact. All those facts are in place and they negotiate and they arrive at a figure of say $90 million that a later appraisal might show was $95 million or something like that. The fact that there's a minor difference in that appraisal in that circumstance where there really were negotiations over price wouldn't defeat the fact that there was a bona fide sale. You're percentage here, 13.3. 12.9 is not different from your 90 versus 95. Now you're getting down to, you're not talking about value, you're talking about negotiation. I am talking about negotiation. That's a very central point. Your answer before, as to the $400,000 that it automatically makes it non-bonafide, makes no sense based on what you just said. No, and I'm not being clear. When I'm talking about 90 million versus 95, that's the value of everything that's exchanged, cash and depreciable assets and land and everything. So I wasn't being clear in my example. The reason that the 13.3 million to 12.9 million is relevant is because that's just cash to cash before you even look at the depreciable assets. And program memorandum A-766 is very clear about how you go about the calculations. First, you compare cash to cash. And if you've given up more in cash than you've gotten back and surrendered to the library. How much do they get in cash? How much did 2.328, correct? Well, cash assets. Monetary assets, current assets. Cash, you think cash. I was using a short hand. I was using a short hand current assets and program memorandum is very clear that you compare current assets to liability. So, I don't expect. The current assets of 10.3 million is made up of 5.3 and receivables, prepaid workers compensation, capital assets. And I think we're looking at page 243 of the appendix. That is what the provider represented was the fair market value of all of those current assets. So, that's the value. 10.3 million plus the $30 million of the foundation, which perhaps I should address now if the court is so inclined. The $3 million value of the foundation commitment, the provider contends this entirely discretionary is worth nothing. That's just squarely belied by the record. And the administrator directly addressed this in the administrator's opinion. The foundation, we're in the record
. No, and I'm not being clear. When I'm talking about 90 million versus 95, that's the value of everything that's exchanged, cash and depreciable assets and land and everything. So I wasn't being clear in my example. The reason that the 13.3 million to 12.9 million is relevant is because that's just cash to cash before you even look at the depreciable assets. And program memorandum A-766 is very clear about how you go about the calculations. First, you compare cash to cash. And if you've given up more in cash than you've gotten back and surrendered to the library. How much do they get in cash? How much did 2.328, correct? Well, cash assets. Monetary assets, current assets. Cash, you think cash. I was using a short hand. I was using a short hand current assets and program memorandum is very clear that you compare current assets to liability. So, I don't expect. The current assets of 10.3 million is made up of 5.3 and receivables, prepaid workers compensation, capital assets. And I think we're looking at page 243 of the appendix. That is what the provider represented was the fair market value of all of those current assets. So, that's the value. 10.3 million plus the $30 million of the foundation, which perhaps I should address now if the court is so inclined. The $3 million value of the foundation commitment, the provider contends this entirely discretionary is worth nothing. That's just squarely belied by the record. And the administrator directly addressed this in the administrator's opinion. The foundation, we're in the record. Give me an appendix site to what under what says it is not just discretionary. Page is 591 in 92 of the appendix. Page 597 of the appendix. Right. 592 at the end of section 1.1 says, distributions at such time in such manner shall support the activities as the foundation in its discretion shall determine. Right. And then you combine that with page 597 of the appendix, which says section 6.2. Notwithstanding the foregoing and without the necessity of obtaining the authority consent or approval of any court, the foundation may amend the terms of the agreement with respect to the administration, et cetera, et cetera. Provided, however, that this section 6.2 shall not be construed as authorizing any amendment whereby any parts of the fund's assets may be diverted from the purposes set for Article 1. They're not diverted. Right. It can't divert them, but it doesn't mean they have to pay them out. So the only thing the foundation can do is pay out or invest for a later payout. They're not paying out. But there's no third option. They either have to pay out at some later point after they've invested it. Well, if they pay out in 25 years, it may be worth nothing today. So the present value of the $3,000,000 might be $600,000. How do we know? Well, what you know is what the parties thought at the time of transaction and the present value of $3 million is $3 million. It may, they may do fantastically in the market. They may do poorly in the market. How can you say, McElvain, that was a purely discretionary foundation. Judge Frendel has just indicated perhaps they held onto it and did not pay out for 25 years. How can you say that this is an immediate available asset? I don't understand that. There were two, it was not a purely discretionary fund
. Give me an appendix site to what under what says it is not just discretionary. Page is 591 in 92 of the appendix. Page 597 of the appendix. Right. 592 at the end of section 1.1 says, distributions at such time in such manner shall support the activities as the foundation in its discretion shall determine. Right. And then you combine that with page 597 of the appendix, which says section 6.2. Notwithstanding the foregoing and without the necessity of obtaining the authority consent or approval of any court, the foundation may amend the terms of the agreement with respect to the administration, et cetera, et cetera. Provided, however, that this section 6.2 shall not be construed as authorizing any amendment whereby any parts of the fund's assets may be diverted from the purposes set for Article 1. They're not diverted. Right. It can't divert them, but it doesn't mean they have to pay them out. So the only thing the foundation can do is pay out or invest for a later payout. They're not paying out. But there's no third option. They either have to pay out at some later point after they've invested it. Well, if they pay out in 25 years, it may be worth nothing today. So the present value of the $3,000,000 might be $600,000. How do we know? Well, what you know is what the parties thought at the time of transaction and the present value of $3 million is $3 million. It may, they may do fantastically in the market. They may do poorly in the market. How can you say, McElvain, that was a purely discretionary foundation. Judge Frendel has just indicated perhaps they held onto it and did not pay out for 25 years. How can you say that this is an immediate available asset? I don't understand that. There were two, it was not a purely discretionary fund. They had two options either pay out or invest and then the later, but not to be paid out. What is not discretionary, Mr. McElvain? Well, it's discretionary that ultimately the assets have to be used for the benefit of the hospital. So the timing is up to the foundation, but that the ultimate use ultimately has to go to the hospital. So whether it's used now or used later, the present value at the time of the merger in either case is going to be $3 million. To put it another way, in a very different case, the provider could have come forward and said the actual fair market value was something different from $3 million. They didn't. All they said was it's entirely discretionary fund, which is just squarely wrong when you look at the record. So it was their burden to say that the value was something different from $3 million and they just didn't attempt to meet that burden. Can you touch on the relatedness issue? Quite frankly, I don't understand the Secretary's interpretation. To my mind, it eliminates mergers from qualifying for this deduction because it requires an abdication of control by the emerging entities. And that's just unrealistic. Tell me how it works, first of all, with the language of the regulation saying that it has to be between. Isn't the language it has to be between unrelated parties? Right. And doesn't that mean that if it mergers between A and B, then how can we say that we look at anything other than whether A and B are related? If A and B merge, if A merges into B and it's part of the merger, A assumes some significant control over B, then you have A on both sides of the transaction. That's a related party. Well, but A and B end up becoming C. But I'm concerned about where A is. That would be a consolidation. I mean, isn't that whole idea that if it's a sham that they're related and they're doing this just for that purpose that you want to look at whether A and B are related because that would indicate sham? No, very definitely not. It's not just the question of whether it's purely a sham. It's whether or not there are some significant continued control. Well, there's a few. It doesn't have to be a sham. Tell me a merger where there isn't. I don't get it. There are plenty of mergers. It's more common in the four profit context
. They had two options either pay out or invest and then the later, but not to be paid out. What is not discretionary, Mr. McElvain? Well, it's discretionary that ultimately the assets have to be used for the benefit of the hospital. So the timing is up to the foundation, but that the ultimate use ultimately has to go to the hospital. So whether it's used now or used later, the present value at the time of the merger in either case is going to be $3 million. To put it another way, in a very different case, the provider could have come forward and said the actual fair market value was something different from $3 million. They didn't. All they said was it's entirely discretionary fund, which is just squarely wrong when you look at the record. So it was their burden to say that the value was something different from $3 million and they just didn't attempt to meet that burden. Can you touch on the relatedness issue? Quite frankly, I don't understand the Secretary's interpretation. To my mind, it eliminates mergers from qualifying for this deduction because it requires an abdication of control by the emerging entities. And that's just unrealistic. Tell me how it works, first of all, with the language of the regulation saying that it has to be between. Isn't the language it has to be between unrelated parties? Right. And doesn't that mean that if it mergers between A and B, then how can we say that we look at anything other than whether A and B are related? If A and B merge, if A merges into B and it's part of the merger, A assumes some significant control over B, then you have A on both sides of the transaction. That's a related party. Well, but A and B end up becoming C. But I'm concerned about where A is. That would be a consolidation. I mean, isn't that whole idea that if it's a sham that they're related and they're doing this just for that purpose that you want to look at whether A and B are related because that would indicate sham? No, very definitely not. It's not just the question of whether it's purely a sham. It's whether or not there are some significant continued control. Well, there's a few. It doesn't have to be a sham. Tell me a merger where there isn't. I don't get it. There are plenty of mergers. It's more common in the four profit context. But imagine this. Imagine this in this context. You had the parent Heritage Health Foundation. Suppose Heritage Health Foundation had two hospitals, Braddock and Alpha Hospital. And they decided their best interest. We want money to continue to operate Alpha Hospital. And the way to do that is we just have to sell Braddock Hospital and let it go its own way and disappear. So they structure that as a merger with UPMC or whoever. In a real exchange where where the hospital sentence way there's no continued control and they get a real consideration, real money in exchange with which they will now then devote to the other hospital that they control. It happens very frequently in the four profit context. The difference between the sale and emerging and consolidation is often one just of form when you're talking about four profit entities engaging in complex transactions. So it does happen with relative frequency that there will be a true divorce of control when party mergers. Divorce of control from the parent you're saying. You're talking about Braddock and UPMC merging. Are they related before this merger? Are they related to each other? They became merge? Well, yes. Are they related to each other before this merger occurred? They became they became related at the time of the merger. But the merger between related entities doesn't that mean that the time they merge? At the time they merge. The two have to be unrelated and weren't they unrelated? They were unrelated before. At the time of the merger, they were related because there was this contemplation of continued control. What does between mean? Between related parties? Between maybe. Yeah. And so and our so the question is are A and B related? And they weren't? No, they were. They were related at the time of the merger. They became after the merger. No, at the time of the merger. And four point one. I don't want to argue with you. I'm already
. But imagine this. Imagine this in this context. You had the parent Heritage Health Foundation. Suppose Heritage Health Foundation had two hospitals, Braddock and Alpha Hospital. And they decided their best interest. We want money to continue to operate Alpha Hospital. And the way to do that is we just have to sell Braddock Hospital and let it go its own way and disappear. So they structure that as a merger with UPMC or whoever. In a real exchange where where the hospital sentence way there's no continued control and they get a real consideration, real money in exchange with which they will now then devote to the other hospital that they control. It happens very frequently in the four profit context. The difference between the sale and emerging and consolidation is often one just of form when you're talking about four profit entities engaging in complex transactions. So it does happen with relative frequency that there will be a true divorce of control when party mergers. Divorce of control from the parent you're saying. You're talking about Braddock and UPMC merging. Are they related before this merger? Are they related to each other? They became merge? Well, yes. Are they related to each other before this merger occurred? They became they became related at the time of the merger. But the merger between related entities doesn't that mean that the time they merge? At the time they merge. The two have to be unrelated and weren't they unrelated? They were unrelated before. At the time of the merger, they were related because there was this contemplation of continued control. What does between mean? Between related parties? Between maybe. Yeah. And so and our so the question is are A and B related? And they weren't? No, they were. They were related at the time of the merger. They became after the merger. No, at the time of the merger. And four point one. I don't want to argue with you. I'm already. I was not even in the. Can you? UPMC Braddock was created to be the receptacle of the transfer. It wasn't even in existence. It was created before the merger by UPMC. But and so it was a shell corporation. It was only after the merger was related. No, at the time of the merger, they were related. What was the relationship? I'm sorry. It was related in what respect? They were related in that they had a right of continued participation on the board, but not only that. Also the foundation had the right to be consulted on fundamental changes. In front of an interim period, they actually had veto power over those fundamental changes. Third, the medical staff continued unchanged and the structure of the hospital was that the medical staff also had significant managerial powers. They had the power to set the bylaws, for example. The sole member of each entity was different. The sole member was different. Yes, but it doesn't have to be a complete total identity of the relationship before and after. It has to be a significant continued power of control, not not a total identity. I do want to return to the question of whether or not. Have you added five minutes for him? You did so the red light means with the five minutes. Okay. Leonard, did you have further questions? No, ma'am. You would sum up. Just very briefly since I'm out of time, on the question of whether it has to be related at the time or related before, that question is answered by 413.134L22, which talks about a relationship that's created actually at the closing table of the other transaction and says that's a related party issue. So the regulation itself answers that question. So for both because it's a bona fide sale and because it's a related party, not a bona fide sale and because it's a related party transaction, the administration's decision should be affirmed. Thank you. Mr
. I was not even in the. Can you? UPMC Braddock was created to be the receptacle of the transfer. It wasn't even in existence. It was created before the merger by UPMC. But and so it was a shell corporation. It was only after the merger was related. No, at the time of the merger, they were related. What was the relationship? I'm sorry. It was related in what respect? They were related in that they had a right of continued participation on the board, but not only that. Also the foundation had the right to be consulted on fundamental changes. In front of an interim period, they actually had veto power over those fundamental changes. Third, the medical staff continued unchanged and the structure of the hospital was that the medical staff also had significant managerial powers. They had the power to set the bylaws, for example. The sole member of each entity was different. The sole member was different. Yes, but it doesn't have to be a complete total identity of the relationship before and after. It has to be a significant continued power of control, not not a total identity. I do want to return to the question of whether or not. Have you added five minutes for him? You did so the red light means with the five minutes. Okay. Leonard, did you have further questions? No, ma'am. You would sum up. Just very briefly since I'm out of time, on the question of whether it has to be related at the time or related before, that question is answered by 413.134L22, which talks about a relationship that's created actually at the closing table of the other transaction and says that's a related party issue. So the regulation itself answers that question. So for both because it's a bona fide sale and because it's a related party, not a bona fide sale and because it's a related party transaction, the administration's decision should be affirmed. Thank you. Mr. Braver, we'll add you two minutes. I think I will take less just a couple of points. The European judge, you're right. There was a receptacle set up. When you have to have something go into something, you have to open up your doors then the suggestion that we, the same medical staff, it's a hospital. I mean, even change administration or presidential election, federal governments just don't get rid of everybody. There's a president comes in, people take their jobs, some people don't. Everybody didn't take a job here, but that's not the issue. We did not give up, as was suggested, the hospital for nothing. 13.3 million dollars, 2.3 in cash, 12.9 million dollars. We basically, 2.9 million, we got for the hospital. There's only a $400,000 difference. This was the administration. Mr. Braver, I was talking about another category of assets that was not included in the 13.3 million. He was talking about appreciable assets that you got over and above 13.3 million. At least that's what I understood on the side. The document that Judge Rendell was looking at, which has all of our assets, there was the cash and non-monetary assets, which also included the accounts receivable, which accounts receivable may have, although it said 5.2 million, they might have been more, who knows, when I collected it. But in any event, the total of the cash and the workman's comp and the AR came to something like 10.2 million, then you have a $3 million physical asset. That's 13
. Braver, we'll add you two minutes. I think I will take less just a couple of points. The European judge, you're right. There was a receptacle set up. When you have to have something go into something, you have to open up your doors then the suggestion that we, the same medical staff, it's a hospital. I mean, even change administration or presidential election, federal governments just don't get rid of everybody. There's a president comes in, people take their jobs, some people don't. Everybody didn't take a job here, but that's not the issue. We did not give up, as was suggested, the hospital for nothing. 13.3 million dollars, 2.3 in cash, 12.9 million dollars. We basically, 2.9 million, we got for the hospital. There's only a $400,000 difference. This was the administration. Mr. Braver, I was talking about another category of assets that was not included in the 13.3 million. He was talking about appreciable assets that you got over and above 13.3 million. At least that's what I understood on the side. The document that Judge Rendell was looking at, which has all of our assets, there was the cash and non-monetary assets, which also included the accounts receivable, which accounts receivable may have, although it said 5.2 million, they might have been more, who knows, when I collected it. But in any event, the total of the cash and the workman's comp and the AR came to something like 10.2 million, then you have a $3 million physical asset. That's 13.1, 13.2 in given 13.3 against 12.9 million, 10.000. So it's basically $1 for dollars. There was no issue with respect to it. I think you are correct. The way this program, M.A.R. was set up was to make sure that there would never be a payout on a recapture. That's what, when I went back to say what they didn't do in 1996, when they Congress properly changed the law, they went back and said, oh my God, we're going to have recapture. They had no problems with these regulations when they were, when they were, when they were gains and there was more money coming back into Medicare. There is clearly no relationship before. We only had six directors go on to a board of 18. Here own example in the program, M.A.R. and them that they say, this is it, this is the gospel, talks about 50%. We don't, even if we voted in a block. And just regarded every fiduciary duty that would be imposed, the duty of care, the duty of loyalty, there's no control. Thank you very much. Thank you, Council. Case was well argued. Do you, Leonard, do you need a transcript? I don't think- I was just going to ask you whether the parties could provide us with a transcript of the Arctic. See the clerk and make arrangements. You can split the cost if you would of a transcript of this argument
. We'd appreciate it. It's an important case. Thank you very much. And we will ask that the courtroom be cleared and we'll, Leonard, if you just want to stay there, you want to confer now? Yes, I'd like to. Thank you, time, gentlemen