In re Corporacion de Servicios Medicos Hosp., Bankruptcy No. 85-553(B)
| Decision Date | 15 April 1986 |
| Docket Number | Bankruptcy No. 85-553(B),Adv. No. 85-229,Civ. No. 85-2029 (JAF),86-0363 (JAF) and 86-0364 (JAF),Misc. No. 86-0030 (JAF). |
| Court | U.S. District Court — District of Puerto Rico |
| Parties | In re CORPORACION DE SERVICIOS MEDICOS HOSPITALARIOS DE FAJARDO, Debtor. CORPORACION DE SERVICIOS MEDICOS HOSPITALARIOS DE FAJARDO, Plaintiff/Appellee, v. Hon. Luis IZQUIERDO MORA, representing the Department of Health, Defendant/Appellant. CORPORACION DE SERVICIOS MEDICOS HOSPITALARIOS DE FAJARDO, v. DEPARTMENT OF HEALTH OF the COMMONWEALTH OF PUERTO RICO. CORPORACION DE SERVICIOS MEDICOS HOSPITALARIOS DE FAJARDO, Petitioner/Appellant, v. Hon. Luis IZQUIERDO MORA, representing the Department of Health, Respondent/Appellee. CORPORACION DE SERVICIOS MEDICOS HOSPITALARIOS DE FAJARDO, Petitioner/Appellee, v. Hon. Luis IZQUIERDO MORA, representing the Department of Health, Respondent/Appellant. |
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Maria Luisa Contreras, San Juan, P.R., for petitioner-appellant.
Virgilio Méndez Custas, Rio Piedras, P.R., for respondent-appellee.
The Department of Health of the Commonwealth of Puerto Rico (the Department), as an arm of the local Executive Branch of Government1 is authorized by law to enter into commercial transactions with private medical entrepreneurs. The law authorizes the Department and the "Administración de Facilidades y Servicios de Salud" (AFASS) to contract out the management, use, and operation of government-owned hospitals to private entities. 24 L.P.R.A. Secs. 331-332a; 337-337m.
Pursuant to the mentioned statutory authority, on December 1, 1982 the Department stepped down from its sovereign position and, jointly with AFASS, negotiated such a contract for the management and operation of the Fajardo Subregional Hospital, located in Fajardo, Puerto Rico.2 The exclusive right to operate said hospital was awarded by contract to "Corporación de Servicios Médicos Hospitalarios de Fajardo, Inc." (Corporación), a private corporation organized and existing under and by virtue of the laws of the Commonwealth of Puerto Rico.
The contract specifically provided that one of its goals was to assure the availability of efficient health services for the Fajardo subregion population and to establish a positive image for the hospital and the services rendered therein by retaining highly-qualified professional personnel.
The contract further provided that the corporation was to organize, administer, and operate the hospital as per contract guidelines, all pursuant to procedures to be submitted to the Department by Corporación. This included dealing with personnel problems, systems for medical records, per diems, nursing services, maintenance, sanitation, staffing patterns, invoicing and collection of moneys, and other financial aspects of the hospital's operation.
Under the terms of the contract, the Department agreed to pay Corporación a fixed annual fee of approximately $6,300,000 due on July and January of each year. This annual fee was renegotiated at a later date. It went up as high as $7,000,000 in the year 1983. The December 1, 1982 contract between the Department and AFASS and Corporación had a duration of ten years, the expiration date being fiscal year 1992-1993.
During the period under which Corporación became the operator and manager of the hospital, said institution received a three-year accreditation by The Joint Commission on Accreditation of Hospitals, as well as an accreditation by the U.S. Department of Health and Human Services. The accreditation of the Joint Commission accrued in November, 1984. The federal accreditation was awarded after the hospital was inspected in October, 1985. The hospital was found in compliance with all Medicare requirements as conditions for participation in said federal program.3
At some point in time in 1984, and pursuant to contract terms and conditions, the Department decided to conduct an audit of the Fajardo Subregional Hospital. The certified public accountant firm of Coopers & Lybrand was commissioned to conduct the audit. This could not be accomplished due to inadequate financial data kept by Corporación.
A change in political administration took place in Puerto Rico as a result of the November, 1984 general elections. During February and March, 1985, the Department, through the newly-appointed Secretary of Health, Dr. Luis Izquierdo Mora, commissioned a different firm of certified public accountants to audit the subregional hospital, that is to say, to carry out the job originally assigned to Coopers. On this occasion, in addition to the intervention of the auditing firm of Arthur Andersen & Co., the Department appointed an advisory team of professionals to concurrently report on the contract and its performance. This group was composed of lawyers, physicians, economists, and employees of the Department.
Based on the findings of Arthur Andersen & Co. and the recommendations of the "ad hoc" committee appointed by the Department, litigation was commenced by the Department and AFASS against Corporación by the filing of a civil action before the Superior Court of Puerto Rico, San Juan Part, on April 22, 1985. Although the caption of the local filing identifies the suit as being one for declaratory judgment and injunctive relief, the allegations as such did not request declaratory relief. The complaint sought the termination of the contract for noncompliance of terms and conditions on the part of Corporación. Injunctive relief seeking the return of the property to the hands of the Department was also requested.
On May 10, 1985, Corporación filed a petition for reorganization under the provisions of Chapter 11 of the Federal Bankruptcy Code, 11 U.S.C. Secs. 1101-1174.4 As expected, the bankruptcy court became aware of the existence of local proceedings. Notice of such proceedings was first given informally to the bankruptcy court. This was followed by an informative motion which, quoted in its pertinent part, reads as follows:
Informative Motion
On the basis of the informative motion and without having the benefit of a copy of the local complaint or being aware of the extent of the remedy there requested, the bankruptcy court entered, on June 12, 1985, an order of abstention regarding the local proceeding. The bankruptcy court stated:5
The Department continued its offensive against Corporación. Being fully aware of debtor's bankruptcy proceedings, it notified the debtor that its license to operate the hospital (Lic. No. 4 of July 1, 1984) would be revoked in thirty (30) days for alleged failure to comply substantially with Law No. 101, of June 26, 1965, as amended, and the regulations thereunder. The Department, in its dual role as the moving party and as the quasi-judicial body entrusted to make the final determinations on the issue, alleged that Corporación's operation of the hospital was creating a grave risk of health, security, and threat to the life of the patients. An administrative hearing was set by the Department to take place before a hearing examiner on July 3, 1985. The same was continued to July 8, 1985.
Once again, the matter was brought to the attention of the bankruptcy court. The debtor, faced with the ongoing bankruptcy proceeding and the local suit, over which the bankruptcy court had decided to abstain, found itself litigating in a third forum. The debtor requested that the administrative process be stayed. The bankruptcy court decided to look into the matter further and conducted sua sponte an inspection of the hospital premises. After careful consideration of the testimony presented at a hearing and taking into consideration the results of the inspection realized, the bankruptcy court determined that the hospital was "clean, modern, and an apparently-efficient facility," and that the license revocation proceeding was within the meaning of 28 U.S.C. Sec. 157(b)(2) (core proceeding). An order for a stay was issued under 11 U.S.C. Sec. 105(a).6 This order was entered on August 2, 1985. The order stayed the Department's administrative proceeding to revoke the hospital's license while the civil suit for injunctive and declaratory relief pending at the Superior Court of Puerto Rico continued its course.
On Friday, November 11, 1985, the Superior Court of Puerto Rico terminated the contract between the...
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