United States: Focus On Health Care Provider Bankruptcies

Last Updated: October 4 2017
Article by Amy Edgy and Mark G. Douglas

The next few years are expected to see a significant increase in the volume of bankruptcy cases filed by health care providers. Thus far in 2017, the number of bankruptcies in health care-related sectors, including hospitals, physicians' offices and clinics, specialty outpatient facilities, assisted-living facilities, and other providers, has been surpassed only by bankruptcies in the oil and gas, finance, and retail industries. According to Standard & Poor's Global Ratings, the health care sector has seen a significant jump in the number of distressed companies, although it still ranks behind oil and gas, financial institutions, consumer products, media/entertainment, capital goods, and retail on the agency's list.

This uptick can be attributed to a number of factors, including continuing uncertainty concerning the possible collapse, replacement, or defunding of the Affordable Care Act; increased competition; the need for investment in additional personnel and technology; the erosion of profitability due to the evolution from a "fee for service" payment model to a "bundle of services" payment model; liquidity problems caused in part by delays or disputes regarding reimbursement from government and private payers as well as the recoupment or setoff of overpayments; operational changes; increased pharmaceutical costs; and rising wages. These and other factors have led an increasing number of financially distressed providers to consider bankruptcy as a vehicle for effectuating closures, consolidation, restructurings, and related transactions.

Health Care Provider Bankruptcy Issues

Certain provisions in the Bankruptcy Code deal specifically with health care debtors. Others apply more generally to nonprofit (eleemosynary) entities, among which are many hospitals and other health care providers. Finally, certain issues arising in bankruptcy cases have special significance for health care providers. These provisions and issues include, but are not limited to:

Disposal of Patient Records. "Patient records" (defined in section 101(40B) of the Bankruptcy Code) are vitally important documents in the health care industry and as such are subject to stringent federal and state confidentiality and disclosure regulations. Section 351 of the Bankruptcy Code, as supplemented by Rule 6011 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), provides specific requirements for the disposal of patient records that apply only if, in the bankruptcy case of a "health care business," the trustee has insufficient funds to pay for the storage of patient records "in the manner required under applicable Federal or State law." The trustee is obligated to provide personal and publication notice that the records will be either entrusted to an appropriate federal agency or destroyed unless claimed within one year.

Section 101(27A) of the Bankruptcy Code defines a "health care business" as:


[A]ny public or private entity (without regard to whether that entity is organized for profit or not for profit) that is primarily engaged in offering to the general public facilities and services for . . . the diagnosis or treatment of injury, deformity, or disease; and . . . surgical, drug treatment, psychiatric, or obstetric care; [and includes, among other providers, hospitals; emergency treatment facilities; hospices; home health agencies; and nursing, assisted-living, and long-term care facilities].

There have been very few reported decisions regarding section 351, which, like most of the health care bankruptcy provisions, was added to the Bankruptcy Code in 2005. See, e.g., In re LLSS Mgmt. Co., 2008 BL 26599 (Bankr. E.D.N.C. Feb. 11, 2008) (applying section 351's requirements to a chapter 7 trustee's destruction of medical records where applicable state law did not include any record retention requirement); In re 7-Hills Radiology, LLC, 350 B.R. 902 (Bankr. D. Nev. 2006) (ruling that a chapter 11 debtor was not a "health care business" subject to the "patient care ombudsman" provision (section 333), section 351, or other health care business debtor provisions).

Patient Care Ombudsmen. Section 333 of the Bankruptcy Code provides for the appointment of a patient care "ombudsman" within 30 days after the commencement of any health care business bankruptcy case. The ombudsman serves as a "patient advocate," as distinguished from a representative of creditors, entrusted with monitoring the quality of patient care, representing the interests of patients, and reporting to the bankruptcy court every 60 days on the status of patient care. See, e.g., In re Alternate Family Care, 377 B.R. 754 (Bankr. S.D. Fla. 2007) (adopting the widely cited, nonexclusive nine-factor test for determining whether a patient care ombudsman should be appointed); In re Banes, 355 B.R. 532 (Bankr. M.D.N.C. 2006) (denying a motion for the appointment of a patient care ombudsman where the chapter 7 debtor, a former dental services provider, was no longer doing business and was therefore not a "health care business" under section 101(27A)). Bankruptcy Rule 2007.2 sets forth the procedure for appointing a patient care ombudsman. Bankruptcy Rule 2015.1 obligates the ombudsman to file certain reports with the court. Section 330(a) of the Bankruptcy Code provides that patient care ombudsmen are professionals entitled to apply for compensation from the estate.

Duty to Transfer Patients of Closing Health Care Business and Restrictions on Transfers. Sections 704(a)(12) and 1106(a)(1) of the Bankruptcy Code obligate a trustee to use "all reasonable and best efforts" to transfer patients ("patient" is defined in section 101(40A)) from a health care business debtor that is to be closed to an "appropriate" health care business in the vicinity providing substantially similar services and a reasonable quality of care. See, e.g., In re Anderson, 2008 BL 134069 (Bankr. N.D. Cal. June 23, 2008) (ruling that a chapter 7 trustee may abandon a nursing-home facility but must comply with the transfer obligations in section 704(a)(12)). Bankruptcy Rule 2015.2 provides that, unless the court orders otherwise, the trustee in a health care business case may not transfer a patient to another health care business under section 704(a)(12) without giving 14 days' notice of the transfer to any patient care ombudsman, the patient, and any contacts provided by the patient, subject to applicable patient privacy laws. Section 503(b)(8) of the Bankruptcy Code grants a special administrative expense priority for the expenses of winding up a health care business.

Exemption From Automatic Stay for Exclusion From Medicare Participation. Section 362(b)(28) of the Bankruptcy Code exempts from the automatic stay the "exclusion" of a debtor from participation in Medicare or any other federal health care program by the U.S. Secretary of Health and Human Services. "Exclusion" is a specific remedy contemplated by 42 U.S.C. § 1320a-7. It refers to the prohibition of certain individuals and entities from participation in any federal health care program for a period of one to five years, and it can be either mandatory or permissive. Mandatory exclusion is required for criminal convictions on various grounds. Among the permissive exclusion grounds are convictions relating to fraud or obstruction of an investigation or audit, license revocation or suspension, failure to take corrective action, claims for excessive charges or unnecessary services, and the failure of certain organizations to furnish medically necessary services. See, e.g., MMM Healthcare, Inc. v. Santiago (In re Santiago), 563 B.R. 457, 475 (Bankr. D.P.R. 2017) (noting that "[c]ase law regarding the application of section 362(b)(28) is scant" and refusing to decide on a motion for summary judgment whether the termination of a physician's provider agreement by health maintenance organizations was covered by section 362(b)(28) exclusion from the automatic stay).

Termination of Provider Agreements. A commonly contested issue in health care provider bankruptcy cases is whether a federal or state agency can terminate a health care debtor's Medicare or Medicaid provider agreement. The relationship between Medicare or Medicaid programs and providers is expressed in a written provider agreement, which allows providers to participate in the programs' prospective reimbursement programs.

Medicare and Medicaid were created by the Social Security Amendments of 1965. The programs are subject to certain provisions in the Social Security Act of 1935, as amended, 42 U.S.C. Ch. 7 (the "SSA"), which originally omitted medical benefits, as well as other regulations. The Medicare program is administered by the Centers for Medicare & Medicaid Services ("CMS"). CMS, in turn, contracts with regional providers, called "fiscal intermediaries," to review, process, and pay Medicare claims. Medicaid is generally administered by state agencies through medical assistance programs.

Federal and state officials may terminate a provider agreement if they determine that the provider is not complying with its terms or other legal requirements. See SSA §§ 1396i-3(h)(2) and 1396r(h)(2); 42 C.F.R. §§ 488.406 and 488.408(e). A provider is entitled to written notice of any deficiencies noted in a state survey, a statement of any remedies imposed, and a statement of the provider's right to appeal. 42 C.F.R. §§ 488.330(c) and 488.402(f). If a sanction is imposed, the provider may generally contest the underlying findings in a formal evidentiary hearing before an administrative law judge. 42 C.F.R. §§ 498.3(b), 498.5, and 431.153(i).

The SSA limits a provider's ability to pursue claims arising under the law in federal court. Sections 405(g) and 405(h) of the SSA are made applicable to Medicare and Medicaid under SSA §§ 1395ff(b)(1)(A) and 1395ii. Section 405(g) requires the exhaustion of administrative remedies concerning, among other things, a decision by the government to terminate a provider agreement. Section 405(h) provides that, in connection with the government's actions or decisions concerning Medicare and Medicaid (including the termination of provider agreements), no claim may be brought against the government under 28 U.S.C. § 1331 (federal question jurisdiction) or 28 U.S.C. § 1346 (jurisdiction when the United States is a defendant).

The majority of circuits have adopted the view that, although section 405(h) omits any reference to grants of jurisdiction under 28 U.S.C. § 1334, which governs jurisdiction in bankruptcy cases, the jurisdictional bar nevertheless applies to grants of jurisdiction in bankruptcy cases, meaning that the bankruptcy court lacks jurisdiction to resolve a dispute over the termination of a provider agreement until the provider has exhausted administrative remedies. See Fla. Agency for Health Care Admin. v. Bayou Shores SNF, LLC (In re Bayou Shores SNF, LLC), 828 F.3d 1297 (11th Cir. 2016); Nichole Med. Equip. & Supply, Inc. v. TriCenturion, Inc., 694 F.3d 340 (3d Cir. 2012); Midland Psychiatric Assocs., Inc. v. United States, 145 F.3d 1000 (8th Cir. 1998); Bodimetric Health Servs., Inc. v. Aetna Life & Cas., 903 F.2d 480 (7th Cir. 1990); accord Parkview Adventist Med. Ctr. v. United States, 2016 BL 166858 (D. Me. May 25, 2016). The Ninth Circuit has adopted a contrary position. See Do Sung Uhm v. Humana, Inc., 620 F.3d 1134 (9th Cir. 2010); see also Nurses' Registry & Home Health Corp. v. Burwell, 533 B.R. 590 (Bankr. E.D. Ky. 2015) (noting in connection with a motion for a stay pending appeal that the court previously ruled that section 405(h) does not preclude the issuance of an injunction and order to continue payments under a provider agreement in a Medicare dispute where administrative remedies have not been exhausted because it omits reference to 28 U.S.C. § 1334; however, the court vacated the order in December 2015 following a settlement and joint request for vacatur).

In Bayou Shores, for example, the Eleventh Circuit ruled that a bankruptcy court does not have jurisdiction to enjoin the federal government from terminating Medicare and Medicaid provider agreements due to Medicare's jurisdictional bar in section 405(h) of the SSA. The Eleventh Circuit accordingly affirmed a district court order overturning bankruptcy court orders enjoining termination of such a provider agreement and confirming a plan under which the debtor assumed the agreement. The U.S. Supreme Court refused to review the ruling on June 5, 2017. See Bayou Shores SNF, LLC v. Fla. Agency for Health Care Admin., 198 L. Ed. 2d 658 (U.S. 2017).

In Parkview Adventist Med. Ctr. v. United States, 842 F.3d 757 (1st Cir. 2016), the First Circuit acknowledged the majority view on the issue but resolved the case before it on narrower grounds. It considered a bankruptcy court's determination that, pending a hospital's exhaustion of administrative remedies, as required by section 405(h), the court lacked jurisdiction over a hospital debtor's motion seeking a determination that the government's termination of a Medicaid provider agreement violated the automatic stay (among other things). However, instead of wading into the jurisdictional morass, the First Circuit ruled that termination of the provider agreement was excepted from the automatic stay under section 362(b)(4), which provides that the automatic stay of actions against the debtor does not apply to an action or proceeding by a "governmental unit" to enforce its "police and regulatory power."

A Seventh Circuit panel refused to rule on the jurisdictional question in Home Care Providers, Inc. v. Hemmelgarn, 2017 BL 221083 (7th Cir. June 27, 2017). It held instead that the appeal of a bankruptcy court's injunction preventing the federal government from terminating provider agreements was moot because the agreements expired before the district court ruled that the bankruptcy court lacked jurisdiction under section 405(h). The health care provider petitioned for en banc reconsideration of the ruling on July 11, 2017.

Special Problems Regarding Recoupment and Setoff. Under Medicare and Medicaid's periodic interim payment system, reimbursement payments under provider agreements are made before the government agency has determined whether the provider is fully entitled to reimbursement. See 42 C.F.R. § 413.60. Section 1395g(a) of the SSA provides that:


[t]he Secretary shall periodically determine the amount which should be paid under this part to each provider of services with respect to the services furnished by it, and the provider of services shall be paid, at such time or times as the Secretary believes appropriate . . . the amounts so determined, with necessary adjustments on account of previously made overpayments or underpayments.

The provider is legally obligated to return any overpayments.

If a provider files for bankruptcy before remitting overpayments to CMS or a regional agency, the automatic stay may or may not prevent actions by CMS or the agency to recover the overpayments. Most courts have concluded that a provider's participation in the Medicare program involves a single, integrated, and ongoing transaction between the government and the provider, such that the government's recovery of overpayments is a "recoupment" rather than a setoff. See, e.g., In re Slater Health Ctr., Inc. (Slater), 398 F.3d 98 (1st Cir. 2005); In re Holyoke Nursing Home, Inc., 372 F.3d 1 (1st Cir. 2004); In re Doctors Hosp. of Hyde Park, Inc., 337 F.3d 951 (7th Cir. 2003); In re TLC Hosps., Inc., 224 F.3d 1008 (9th Cir. 2000); United States v. Consumer Health Servs. of Am., Inc., 108 F.3d 390 (D.C. Cir. 1997). But see In re Univ. Med. Ctr., 973 F.2d 1065 (3d. Cir. 1992) (reasoning that because each government payment provides compensation for services performed in a set time span, each payment concerned different services rendered and thus constituted a separate transaction).

The distinction is important, because any post-bankruptcy setoff of mutual pre-bankruptcy claims arising from separate transactions under section 553 of the Bankruptcy Code is subject to the automatic stay (see 11 U.S.C. § 362(a)(7)), whereas recoupment—involving a single transaction—is not. See Fischbach v. Ctrs. for Medicare & Medicaid Servs. (In re Fischbach), 464 B.R. 258, 262 (Bankr. D.S.C. 2012) (citing In re Univ. Med. Ctr., 973 F.2d 1065 (3d Cir. 1992)), aff'd, 2013 BL 76232 (D.S.C. Mar. 22, 2013).

The doctrine of recoupment is not applied uniformly in all jurisdictions when it comes to health care bankruptcy cases. For example, courts disagree as to whether different provider "cost report years" are part of the "same transaction or occurrence" for purposes of determining whether the government can recoup overpayments from future Medicare reimbursement payments. Compare Sims v. U.S. Dep't of Health & Human Servs. (In re TLC Hosps., Inc.), 224 F.3d 1008, 1013 (9th Cir. 2000) (for purposes of recoupment, "[t]he fact that the overpayments and underpayments relate to different fiscal years does not destroy their logical relationship or indicate that they pertain to separate transactions"), with Univ. Med. Ctr. v. Sullivan (In re Univ. Med. Ctr.), 973 F.2d 1065, 1080 (3d Cir. 1992) ("reimbursement payments made for any one year arise from transactions wholly distinct from reimbursement payments made for subsequent years").

Sale or Closure of Health Care Business—Assumption and Assignment of Provider Agreements. Many distressed health care providers with little prospect for improvement of their financial condition have only two options: shutter the business or attempt to sell it in bankruptcy free and clear of liabilities, including overpayment claims. The viability of a bankruptcy sale depends on a number of factors, including whether the debtor's Medicare or Medicaid provider agreements or provider numbers can be sold or assigned. Other issues impacting a sale may include zoning or regulatory restrictions, potential successor liability for medical malpractice claims, and the impact that a nonprofit health care debtor's charitable mission has on determining the "highest and best" offer for assets. See In re United Healthcare Sys., Inc., 1997 BL 8656 (D.N.J. Mar. 27, 1997); In re HHH Choices Health Plan LLC, 554 B.R. 687 (Bankr. S.D.N.Y. 2016).

Section 363(f) of the Bankruptcy Code authorizes the trustee or chapter 11 debtor-in-possession ("DIP") to sell property of the bankruptcy estate "free and clear of any interest in such property of an entity other than the estate" under certain specified conditions. If the health care business debtor is an operating nonprofit, section 363(d)(1) provides that the trustee or DIP may use, sell, or lease the debtor's property "only in accordance with nonbankruptcy law applicable to the transfer of property" by such debtor. See In re Gardens Reg'l Hosp. & Med. Ctr., Inc., 567 B.R. 820 (Bankr. C.D. Cal. 2017) (because a closed nonprofit hospital does not qualify as a "health facility" under California law, the debtor was not required to obtain the California attorney general's consent prior to selling a material portion of its assets). In addition, pursuant to section 541(f), the assets of a nonprofit corporation debtor may be sold to a for-profit corporation only under the same conditions that govern under applicable nonbankruptcy law. See Ky. Emps. Ret. Sys. v. Seven Cntys Servs., Inc. (In re Seven Cntys Servs., Inc.), 511 B.R. 431 (Bankr. W.D. Ky. 2014) (sections 363(d)(1) and 541(f) did not mandate that a nonprofit debtor remain a member of the state retirement system).

Section 365 of the Bankruptcy Code governs the assumption and assignment of provider agreements. Section 365(b) provides that, with certain exceptions and conditions, an "executory" contract, such as a provider agreement, can be assumed only if the trustee or DIP cures all monetary payment defaults under the agreement. Section 365(f) permits the assignment of an assumed contract if certain additional prerequisites are met.

The monetary cure costs of assuming a provider agreement can be high if the debtor has received significant overpayments. Thus, the ability to sell a provider agreement free and clear of liability for such overpayments can result in significant savings. Few reported decisions have actually addressed whether provider agreements are executory contracts (requiring cure as a condition to assumption and assignment) or assets of the estate that can be sold free and clear of liabilities. Most bankruptcy courts considering the issue, however, have concluded that the Medicare provider agreement is an executory contract. See In re Vitalsigns Homecare, Inc., 396 B.R. 232, 239 (Bankr. D. Mass. 2008) (citing and discussing cases).

However, in In re BDK Health Management, Inc., 1998 WL 34188241 (Bankr. M.D. Fla. Nov. 16, 1998), the bankruptcy court held that Medicare provider agreements are statutory entitlements which can be sold free and clear of claims and interests. The court reasoned that: (i) the rights and duties of health care providers and CMS are set forth in statutes and regulations, rather than contracts; and (ii) a provider must initiate administrative proceedings rather than sue for breach of contract to contest CMS's reimbursement decisions.

By contrast, the bankruptcy court in Vitalsigns ruled that Medicare provider numbers arise out of executory contracts which cannot be assumed and assigned to buyers as part of a sale without curing the associated liabilities. Requiring the provider agreement to be assumed, the court reasoned, "harmonizes both the Medicare and Bankruptcy statutes" without rendering either a nullity (because Medicare statutes and regulations expressly provide for recoupment of overpayments and the Bankruptcy Code expressly authorizes free-and-clear asset sales). Vitalsigns, 396 B.R. at 240–41.

Lender Issues. A health care provider's accounts receivable are frequently pledged as collateral for a loan. However, government accounts receivable, such as Medicare and Medicaid reimbursement payments, are subject to federal and state "anti-assignment rules" that require the payments to be deposited in accounts controlled solely by providers. See 42 U.S.C. §§ 1395g(c) and 1396a(32). As a consequence, government accounts receivable serving as collateral are generally deposited directly into a provider's bank account, from which the funds, in accordance with a "double lockbox" structure, are swept into an account under the lender's control on a daily basis. If the provider files for bankruptcy, the automatic stay prohibits the cash sweep, obligating the debtor and the lender to negotiate a cash-collateral agreement providing for, among other things, "adequate protection" payments to the lender.

Recent Case Study: Gardens Regional Hospital

One of the challenges commonly faced by health care providers that file for bankruptcy protection was the subject of a ruling handed down by the U.S. Bankruptcy Court for the Central District of California in In re Gardens Reg'l Hosp. & Med. Ctr., Inc., 569 B.R. 788 (Bankr. C.D. Cal. 2017).

Gardens Regional Hospital and Medical Center, Inc. (the "debtor") operated a general acute-care hospital in California. In 2014, the debtor entered into an agreement to provide Medicaid services under the California Medical Assistance Program, more commonly known as "Medi-Cal," which is administered by the California Department of Health Care Services (the "DHCS"). The debtor provided health care to Medi-Cal beneficiaries on a fee-for-service basis and, as a result, was entitled to receive Medi-Cal fee-for-service payments. The debtor was also entitled to receive supplemental hospital quality assurance payments ("HQA payments") on account of certain services provided to Medi-Cal beneficiaries.

As a condition to participating as a Medi-Cal provider, the debtor, like other acute-care hospitals, was obligated under California law to pay a quarterly hospital quality assurance fee (an "HQA fee").

In March 2015, the debtor stopped paying its quarterly HQA fees, and it filed for chapter 11 protection in the Central District of California on June 6, 2016. As of the petition date, the debtor owed nearly $700,000 in HQA fees. After the bankruptcy filing, to recover the unpaid prepetition fees, the DHCS began withholding 20 percent of the Medi-Cal payments owed to the debtor, as well as an unspecified percentage of the HQA payments owed to it.

By July 18, 2016, the DHCS had recovered all of the unpaid prepetition HQA fees as a result of its withholding. However, the DHCS continued withholding because the debtor failed to pay postpetition HQA fees. During the case, the DHCS withheld a total of approximately $4.3 million in HQA payments and Medi-Cal payments and applied the withheld funds to unpaid HQA fees. Even with the withholding, the debtor still owed more than $2.5 million in postpetition HQA fees.

The debtor sought a court order compelling the DHCS to disgorge the approximately $4.3 million in payments it had withheld, claiming that the withholding was a setoff which represented an ongoing willful violation of the automatic stay by the DHCS. The debtor further argued that the DHCS could not have effectuated the setoff even if it had obtained stay relief because section 553 of the Bankruptcy Code does not permit postpetition obligations to be set off against prepetition debt.

The DHCS countered that the withholding was a recoupment rather than a setoff because the HQA fees, the HQA payments, and the Medi-Cal payments all arose from the same transaction. In response, the debtor argued that its HQA fee obligation did not arise from the same transaction as its entitlement to HQA payments and Medi-Cal payments because: (i) the HQA fee liability exists whether or not a provider participates in the Medi-Cal program; and (ii) different statutory formulas are used to calculate the HQA fees and the entitlements to HQA payments and Medi-Cal payments.

The bankruptcy court ruled that the doctrine of recoupment allowed the DHCS to withhold the HQA payments without obtaining stay relief. The court explained as follows:


[R]ecoupment is an equitable doctrine that exempts a debt from the automatic stay when the debt is inextricably tied up in the post-petition claim. Unlike setoff, recoupment is not limited to pre-petition claims and thus may be employed to recover across the petition date. The limitation of recoupment that balances this advantage is that the claims or rights giving rise to recoupment must arise from the same transaction or occurrence that gave rise to the liability sought to be enforced by the bankruptcy estate. . . . For recoupment purposes, a transaction may include a series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship, . . . provided that the "logical relationship" test is not applied so loosely that multiple occurrences in any one continuous commercial relationship would constitute one transaction.

2017 BL 213538, at *4 (internal quotation marks and citations omitted).

The court found that a logical relationship existed between the HQA fees and the HQA payments because, without HQA fees, the DHCS could not collect federal matching funds in an amount sufficient to make HQA payments. It noted that courts in the Ninth Circuit have given the term "transaction" a "liberal and flexible construction," requiring only that obligations be "sufficiently interconnected so that it would be unjust to insist that one party fulfill its obligation without requiring the same of the other party." Id. (citing Aetna U.S. Healthcare, Inc. v. Madigan (In re Madigan), 270 B.R. 749, 755 (B.A.P. 9th Cir. 2001)). According to the bankruptcy court, even though different statutory formulas are used to calculate HQA fees and HQA payments, a "fundamental logical connection" exists between them.

The bankruptcy court also determined that the DHCS properly recouped the HQA fees by withholding the Medi-Cal payments. The court explained that the debtor's eligibility to participate in the Medi-Cal program was conditioned on compliance with its provider agreement, including the statutory obligation to pay HQA fees, failing which the DHCS was expressly authorized to deduct unpaid fees from Medi-Cal payments. Thus, the court found that the provider agreement "create[d] a sufficient logical relationship" between the debtor's HQA fee liability and its Medi-Cal payments. Id. at *6.

Outlook

Gardens Regional Hospital is emblematic of the challenges currently faced by many financially distressed health care providers. Even so, the recoupment/setoff distinction is only one of many issues that may be implicated if a provider files for bankruptcy. Others besides those addressed in this article may arise.

For example, because the "absolute priority rule" in section 1129(b)(2) of the Bankruptcy Code may not apply to nonprofit debtors, a health care provider organized as a nonprofit may be able to obtain confirmation of a cramdown chapter 11 plan that retains the pre-bankruptcy ownership structure without paying creditors in full. See In re Whittaker Memorial Hospital Ass'n, 149 B.R. 812 (Bankr. E.D. Va. 1993); In re Independence Village Inc., 52 B.R. 715 (Bankr. E.D. Mich. 1985); see also In re Corcoran Hosp. Dist., 233 B.R. 449, 458 (Bankr. E.D. Cal. 1999) (stating in a hospital case under chapter 9 that "[i]n a reorganization of a municipality under Chapter 9 or of a non-profit corporation under Chapter 11, the [absolute priority] requirement must be interpreted somewhat differently"). This obviously would be an important consideration in a nonprofit company's pre-bankruptcy planning.

Another issue that arises in health care provider bankruptcy cases is whether quality assurance fees levied by state agencies administering Medicaid (such as the HQA fees addressed in Gardens Regional Hospital) are entitled to priority as excise taxes under section 507(a)(8) of the Bankruptcy Code. See In re Ridgecrest Healthcare, Inc., 2017 BL 297740 (Bankr. C.D. Cal. Aug. 24, 2017) (ruling that such fees meet the Ninth Circuit's five-factor test for determining whether a fee is an excise tax).

In addition, although nonprofit health care entities are eligible to file for protection under chapters 7 and 11 (and chapter 9, under certain circumstances), they are not subject to involuntary bankruptcy petitions (see 11 U.S.C. § 303(a)), nor can the chapter 11 case of a nonprofit debtor be converted to a chapter 7 liquidation without the debtor's consent. See 11 U.S.C. § 1112(c).

Still another thorny issue in cases involving distressed nonprofit health care providers is directors' and officers' fiduciary duties, which typically are owed to a charitable mission rather than shareholders when the company is solvent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Mark G. Douglas
Events from this Firm
13 Dec 2017, Seminar, Cleveland, United States

Jones Day partners Harold Gordon and Tony Dias, and Associate Courtney Snyder will explore the significant role New York's Attorney General and its Department of Financial Services (DFS) play in the financial services industry and why these two state-level agencies will continue to exert significant power over the financial services industry, especially with federal oversight potentially shrinking.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions