In re Barnwell Cnty. Hosp.

• Decision Date: 18 April 2013
• Docket Number: No. 11–06207–dd.,11–06207–dd.
• Citation: 491 B.R. 408
• Court: U.S. Bankruptcy Court — District of South Carolina
• Parties: In re BARNWELL COUNTY HOSPITAL, Debtor.

491 B.R. 408

In re BARNWELL COUNTY HOSPITAL, Debtor.

No. 11–06207–dd.

United States Bankruptcy Court, D. South Carolina.

April 18, 2013.

Joseph F Buzhardt, III, John Timothy Stack, Office of the United States Trustee, Columbia, SC, for US Trustee.

J. Ronald Jones, Jr., Charleston, SC, Lindsey Carlbert Livingston, Haynsworth Sinkler Boyd, PA, Stanley H. McGuffin, Columbia, SC, for Debtor.

ORDER GRANTING DEBTOR'S MOTION FOR AN ORDER AUTHORIZING A SUBSTITUTE ASSET PURCHASE AGREEMENT IN AID OF IMPLEMENTATION OF THE PLAN AND APPROVING THE NOTICE AND APPLICATION FOR SETTLEMENT AND COMPROMISE BETWEEN DEBTOR AND SC REGIONAL HEALTH SYSTEM, LLC

DAVID R. DUNCAN, Chief Judge.

This matter is before the Court on the Motion for an Order Authorizing a Substitute Asset Purchase Agreement in Aid of Implementation of the Plan (“Substitution Motion”) entered by the debtor, Barnwell County Hospital (“Debtor”), on December 7, 2012. The Court held a hearing on the Substitution Motion on January 9, 2013. Prior to the hearing, objections to the Substitution Motion were filed by Don Alexander (“Alexander”), the United States Department of Health and Human Services (“HHS”), and SC Regional Health System, LLC (“RHS”). Counsel for the Estate of Robert M. Peeples and six participants of the Barnwell County Pension Plan also appeared at the January 9th hearing and argued in opposition to the Substitution Motion. No party objected at the hearing to counsel for these interested parties arguing in opposition to the Substitution Motion even though no written objection was filed on their behalf prior to the hearing. The Estate of Robert M. Peeples and six participants of the Barnwell County Pension Plan filed a written objection to the Substitution Motion on March 25, 2013.

This matter is also before the Court on the Notice and Application for Settlement and Compromise (“Settlement Application”) seeking approval of a Settlement Agreement and Release (“Settlement Agreement”) between Debtor and RHS entered on February 27, 2013.¹ Objections to the Settlement Application were filed by Alexander, General Electric Corporation d/b/a GE Healthcare Diagnostic Imaging (“GE”), and the Estate of Robert M. Peeples and six participants of the Barnwell County Pension Plan. A hearing was held on the Settlement Application on April 8, 2013. After careful consideration of the applicable law, arguments of counsel, and evidence submitted, the Court grants the Substitution Motion and approves the Settlement Application.

FINDINGS OF FACT²

1. On October 5, 2011, Debtor filed a petition seeking relief under chapter 9 of the United States Bankruptcy Code (“Bankruptcy Code”). Prior to the filing of its petition, the Debtor had been unable to pay its debts as they became due. For years, Barnwell County provided funding to keep Debtor operating, but Debtor was informed that Barnwell County would no longer provide funding. Furthermore, as a rural hospital, Debtor does not have the customer volume to pay for new technology and facilities that larger hospitals in neighboring areas can provide. Based upon those factors, Debtor, along with Bamberg County and Bamberg County Memorial Hospital (“Bamberg Hospital”), sought a third party purchaser to provide healthcare for the residents of Bamberg County and Barnwell County.

2. On September 29, 2011, Debtor, along with Bamberg Hospital, Barnwell County, and Bamberg County, executed an Asset Purchase Agreement (“Original APA”) with RHS for the purchase of substantially all of the assets of Debtor and the Bamberg Hospital.³ Debtor's Amended Plan for Adjustment of Debts, as modified by the Debtor's Modification to First Amended Plan for Adjustment of Debts (collectively, the “Plan”) was based on the transaction contemplated by the Original APA. On May 23, 2012, the Bankruptcy Court entered its Order confirming the Debtor's Plan (the “Confirmation Order”).

3. The transaction contemplated under the Original APA did not close, the reasons for which were vigorously contested by Debtor and RHS. As a result of the transaction not closing, RHS filed an application seeking payment of an administrative expense claim (“RHS Application”) in the amount of approximately $1,819,000.00 for liquidated damages under the Original APA and for compensation and reimbursement of fees and expenses under a separate Consulting Agreement between Debtor and RHS. Debtor objected to the RHS Application and disputed that RHS was entitled to a claim against Debtor. Additionally, Debtor asserted that it was entitledto damages against RHS, which RHS disputed.

4. When the transaction did not close under the Original APA, Debtor sought a new purchaser to be substituted for RHS and close the transaction in accordance with the terms approved in the Plan. Debtor located a new purchaser and executed a new Asset Purchase Agreement with BCH Acquisitions Group, LLC (“BCH Acquisitions Group” or “New Purchaser”) dated November 26, 2012 (the “New APA”). Thereafter, on December 7, 2012, Debtor filed the Substitution Motion seeking an Order from this Court authorizing Debtor to substitute the New APA in place of the Original APA and allowing Debtor to sell its assets to BCH Acquisitions Group instead of RHS as contemplated in the Plan. Debtor's Plan cannot be fully consummated and implemented unless the Court authorizes this substitution.

5. Under the Original APA, RHS was entitled to any payment incentives Debtor had previously received or was entitled to receive at closing under the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”). RHS planned to use the HITECH funds to pay the claims of HHS, First Citizens Bank and Trust Company, Inc. (“First Citizens”), and the South Carolina Office of Rural Health (“SCRH”) as provided in the confirmed Plan, and then keep the remainder of the HITECH funds, with none of the remaining funds being used to pay creditors. Under the New APA, Debtor is entitled to retain all HITECH funds for the two fiscal years ending September 30, 2011, and September 30, 2012, which total approximately $2,578,000.⁴ Since Debtor is retaining these HITECH funds under the New APA, these funds are available to pay operating expenses and claims. Additionally, under the New APA, BCH Acquisitions Group, as part of the purchase price, is paying all the amounts RHS had agreed to pay to Stroudwater Capital, HHS, First Citizens, and SCRH without using the HITECH funds, as well as paying $50,000 in costs Debtor has incurred during bankruptcy.

6. In addition to seeking an administrative expense priority claim against Debtor in the amount of approximately $1,819,000.00, RHS filed an objection to the Substitution Motion. The Court held a hearing on the Substitution Motion on January 9, 2013. After the hearing on the Substitution Motion, Debtor and RHS mediated their dispute and entered into the Settlement Agreement which resolves all issues between RHS and Debtor, including the RHS Application and the objection of RHS to the Substitution Motion. As part of the settlement, RHS agrees to withdraw with prejudice the RHS Application and its objection to the Substitution Motion upon payment of the settlement funds.

7. At the April 8, 2013 hearing, Mary Valient, who has been the Chief Executive Officer (“CEO”) of Debtor since 2009, testified Debtor currently owes about $2.2 million to vendors. She testified that Debtor has funds to operate for three more months, and at that point, Debtor would need to turn to Barnwell County for additional funds. This projection includes using the HITECH funds as well as money the State of South Carolina seizes from the tax refunds of individuals who owe money to Debtor.⁵

7. At the April 8, 2013 hearing, a representative of BCH Acquisitions Group testified that BCH Acquisitions Group is ready to move forward with finalizing and closing the transaction described in the New APA. He also testified BCH Acquisitions Group will have a capitalization of $4 to $8 million at the closing of the New APA.

CONCLUSIONS OF LAW

I. Jurisdiction

The Court has jurisdiction over the matters before it pursuant to 28 U.S.C. §§ 157(a) and 1334, Article XIII of the Plan (setting forth “Retention of Jurisdiction of the Court”), and page 42 of the Confirmation Order (stating that the “Bankruptcy Court's retention of jurisdiction as set forth in Article XIII of the Plan is approved”).

On June 6, 2012, Alexander, an intervener in the case, filed a Notice of Appeal of the Confirmation Order. This appeal is currently pending before the United States District Court for the District of South Carolina (“District Court”). “The general rule is that the filing of a timely and sufficient notice of appeal immediately transfers jurisdiction of all matters relating to the appeal from the district court to the court of appeals.” Grand Jury Proceedings Under Seal v. United States, 947 F.2d 1188, 1190 (4th Cir.1991). “The rule is not absolute, however,” and is a “ ‘judge-made doctrine designed to avoid the confusion and waste of time that might flow from putting the same issues before two courts at the same time.’ ” Id. (quoting In re Thorp, 655 F.2d 997, 998 (9th Cir.1981)). An appeal does not divest a lower court of jurisdiction in at least three circumstances: “(1) over issues not involved in the appeal; (2) when the order appealed from is not appealable; or (3) when the court's action will aid in the appeal.” In re Daufuskie Island Prop., LLC, 441 B.R. 49, 55 (Bankr.D.S.C.2010) (citations omitted).

In his appeal, Alexander is challenging the eligibility of Debtor under 11 U.S.C. § 109 on the grounds that the Barnwell County Hospital Board was not properly constituted due to violations of the South Carolina constitutional prohibition on dual office holding. In his objections to the Substitution Motion and the Settlement Agreement, Alexander asserts that if he is successful on appeal, Debtor's actions in voting to proceed on the Original...