Explore the legal details of a California nonprofit hospital’s asset sale in bankruptcy, where the Attorney General’s conditions were overruled, impacting a $610 million deal. Learn about the implications and case reference.
November 1, 2019
Introduction:
Selling assets of a nonprofit hospital in California during bankruptcy typically requires approval from the state’s attorney general.
The Deal:
This deal involves the sale of four California nonprofit hospitals in bankruptcy for $610 million under Bankruptcy Code Section 363(f).
The Lawsuit:
Nonprofit hospitals in California cannot be sold without the state’s consent, which can come with certain conditions. In this case, California agreed to the sale but imposed two conditions that added an extra financial burden of approximately $305 million on the buyer:
1. The buyer had to continue operating one hospital as a licensed general acute care hospital until December 2024, even though they initially agreed to do so only until December 2020. The extended operation was estimated to cost around $285 million.
2. Another hospital was required to provide $13 million in charity care annually for six fiscal years, which was about $6.4 million more than what the hospital provided in fiscal year 2019. This charity care requirement added an extra cost of approximately $20 million.
The buyer insisted that the sale could only proceed if the bankruptcy court allowed them to sell the hospitals without these conditions, as permitted by § 363(f) of the Bankruptcy Code.
The seller was facing severe liquidity problems, with California withholding about $4.5 million in Medi-Cal fee-for-service payments. The seller couldn’t obtain debtor-in-possession financing and relied on an agreement with secured creditors for funding. Terminating the purchase agreement with the buyer would trigger a default event under this financing agreement. It was uncertain whether the seller could secure alternative financing. Additionally, the seller needed to start the costly process of closing hospitals while still having some cash reserves. Failing to complete this sale would likely force the closure of three out of four hospitals.
Given these circumstances, the court allowed the sale of the hospitals without California’s $305 million conditions, as per Bankruptcy Code 363(f).
Comment:
Selling a bankrupt hospital without certain liabilities can sometimes enable it to continue serving the community.
Case Reference:
This case is referred to as In Re Verity Health System of California, Inc., Lead Case No. 2:18-bk-20151-ER, Jointly Administered With No. 2:18-bk-20162-ER, No. 2:18-bk-20163-ER., 2:18-bk-20164-ER, 2:18-bk-20165-ER, 2:18-bk-20167-ER, 2:18-bk-20168-ER, 2:18-bk-20169-ER, 2:18-bk-20171-ER, 2:18-bk-20172-ER, 2:18-bk-20173-ER, 2:18-bk-20175-ER, 2:18-bk-20176-ER, 2:18-bk-20178-ER, 2:18-bk-20179-ER, 2:18-bk-20180-ER, 2:18-bk-20181-ER, United States Bankruptcy Court, C.D. California Los Angeles Division (October 23, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million
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