Non-Profit Hospital Can Sell Assets Free, Clear in Ch. 11

Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.

By Diane Davis

The assets of a closed non-profit hospital in Chapter 11 bankruptcy can be sold free and clear under the Bankruptcy Code, the U.S. Bankruptcy Court for the Central District of California held ( In re Gardens Reg’l Hosp. & Med. Ctr., Inc. , 2017 BL 161596, Bankr. C.D. Cal., 2:16-BK-17463-ER, 5/15/17 ).

California law requires that a non-profit entity operating a health care facility must obtain the consent of the California attorney general if it wants to sell a material amount of its assets to a for-profit entity.

A closed hospital doesn’t qualify as a “health facility” under California law, Judge Ernest M. Robles wrote May 15.

Gardens Regional Hospital and Medical Center, a 137-bed acute care hospital in Hawaiian Gardens, California, isn’t required to obtain the state attorney general’s consent before selling a material amount of its assets, the court said.

Gardens Regional filed for Chapter 11, which protects companies or individuals from creditors while they seek to reorganize their debt or liquidate under a plan that must be approved by the bankruptcy court.

The court approved the sale of the operating hospital to Strategic Global Management, Inc., a for-profit entity, for $19.5 million. Strategic then assigned its rights to KPC Global Management, LLC.

The California attorney general approved the sale, but imposed some “onerous and unrealistic” financial conditions on the transaction, including reducing the charity care requirement to $500,000 annually, the court said.

Deal Terminated

Strategic and KPC terminated the deal based on the conditions imposed. After exhausting its debtor-in-possession financing, Gardens Regional closed its doors due to lack of funds and proposed selling certain assets of the hospital.

The attorney general argued that the assets were still a “health facility” even though the hospital wasn’t operating. He also contended that it would jeopardize the public welfare if assets intended for charitable purposes could be acquired by for-profit entities without proper oversight.

The court rejected the state’s concern that other health facilities would strategically close to circumvent oversight. Closing a hospital is time-consuming, costly, and requires extensive planning, the court said.

The hospital wasn’t operating at the time of the sale and wasn’t providing any healthcare services to uninsured low-income families, the court said.

Bankruptcy Code Sections 363(b) and (f)(1) allow the court to approve the sale of assets free and clear of the attorney general’s claim that he may impose conditions on the terms of the sale or the use of the assets after the sale, the court said.

Bienert, Miller & Katzman, PLC, Dentons US LLP, Reed M. Mercado, and Employment Development Department represented Gardens Regional Hospital and Medical Center; Dare Law, Office of the United States Trustee, represented the U.S. Trustee.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

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

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