Learn about a recent M&A legal case where a buyer successfully purchased assets from a bankrupt hospital without taking on its liabilities. Explore the implications of Bankruptcy Code Section 363 and its impact on Medi-Cal agreements. Gain insights into the legal battle and its outcome.
October 12, 2019
Introduction:
When acquiring the assets of a financially troubled business undergoing bankruptcy, one primary goal is to obtain these assets without taking on the business’s debts, as per Bankruptcy Code Section 363.
The Deal:
In this specific case, the buyer agreed to buy the assets of four California hospitals for $610 million. These hospitals had been receiving reimbursement from California’s Medi-Cal program for offering healthcare services to low-income individuals under certain agreements. However, these agreements came with more than $50 million in liabilities that the seller owed to California.
The Legal Battle:
The buyer sought permission from the bankruptcy court to purchase these agreements “free and clear of claims and interests” under Bankruptcy Code § 363, meaning California wouldn’t be entitled to any payments in connection with the transfer. California objected, arguing that these agreements couldn’t be sold without the liabilities because they were considered “executory contracts.” This would mean the buyer would have to assume the $50 million in liabilities to receive Medi-Cal reimbursement.
The buyer’s argument was that these agreements weren’t traditional contracts but were more like entitlements. The court sided with the buyer, noting that these agreements didn’t impose obligations on California. The obligations mentioned in these agreements were solely for the seller and didn’t constitute a contractual consideration since they mirrored the seller’s existing legal obligations.
The court likened these Medi-Cal agreements to licenses issued by a government agency, allowing the holder to bill the Medi-Cal program for offering Medi-Cal services. Consequently, the court ruled that under Bankruptcy Code § 363, these Medi-Cal agreements could be sold without the $50 million liabilities owed to California under the state’s Medi-Cal laws.
Comment:
This case demonstrates the advantages of acquiring assets from a struggling business during bankruptcy proceedings. However, it also highlights that not all assets can be obtained without taking on liabilities. For instance, when purchasing executory contracts, like valuable leases, there may be associated liabilities that the buyer can’t avoid.
Case Reference:
In Re Verity Health System of California, Inc., Lead Case No. 2:18-bk-20151-ER, Jointly Administered With Case No. 2:18-bk-20162-ER, Case 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 (September 26, 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
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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