ER Docs Not Paid as ‘Critical Vendors’ of Bankrupt Hospital

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By Daniel Gill

Three emergency room physicians won’t be entitled to special priority for their claims as “critical vendors” to bankrupt hospitals, a Mississippi bankruptcy judge ruled April 4 ( In re Pioneer Health Servs., Inc. , 2017 BL 110590, Bankr. S.D. Miss., No. 16-01119-NPO, 4/4/17 ).

The opinion of Judge Neil P. Olack of the U.S. Bankruptcy Court for the Southern District of Mississippi highlights how paying pre-bankruptcy creditors outside of the priority scheme under the law is disfavored. The hospital failed to meet the tough standard to justify paying the doctors ahead of other creditors.

Pioneer Health Services, Inc. is the parent of several hospitals and healthcare facilities in the Southeastern U.S., the court said. It filed for Chapter 11 on March 30, 2016.

Chapter 11 protects companies (or individuals) from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court. To be approved, the plan must provide that creditors are paid under a certain priority scheme.

Test Not Met

Pioneer filed a motion for authority to pay the pre-bankruptcy debt of three physicians whom the company attempted to designate as “critical vendors.” Under some circumstances, courts can authorize the payment of critical vendors even if those payments don’t follow the statutory priority scheme.

But the court declined to grant the motion. It acknowledged precedent, including the recent U.S. Supreme Court decision in Czyzewski v. Jevic Holding Corp., which authorizes a court to pay critical vendors under limited circumstances. But the test wasn’t met here, it said.

First, Pioneer Health failed to establish that the three doctors were critical and irreplaceable, the court said.

Second, the company did not establish that the physicians would as a certainty leave the hospitals if they weren’t paid their pre-bankruptcy claims.

Finally, the court said the debtor had an alternative to keep the doctors employed. The court suggested that if the doctors were threatening to leave if they weren’t paid, that conduct might amount to a sanctionable violation of the automatic stay against acts to collect from a debtor in bankruptcy (without first getting the court’s permission).

The court also noted that while critical vendor motions are usually brought in the first days of a Chapter 11 proceeding, this motion wasn’t filed until 10 months into the case.

In sum, the court “finds no ‘significant offsetting bankruptcy-related justification’ for classifying the Affected Physicians as as critical vendors.”

Pioneer Health was represented by Waller Lansden Dortch & Davis LLP, Birmingham Ala. The Official Unsecured Creditors Committee, which objected to the motion, was represented by Arnall Golden Gregory LLP, Atlanta.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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