In re Lower Bucks Hosp.

• Decision Date: 10 May 2012
• Docket Number: Bankruptcy No. 10–10239 ELF.
• Citation: 471 B.R. 419
• Parties: In re LOWER BUCKS HOSPITAL, Lower Bucks Health Enterprises, Inc., Advanced Primary Care Physicians, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

471 B.R. 419

In re LOWER BUCKS HOSPITAL, Lower Bucks Health Enterprises, Inc., Advanced Primary Care Physicians, Debtors.

Bankruptcy No. 10–10239 ELF.

United States Bankruptcy Court, E.D. Pennsylvania.

May 10, 2012.

Adam H. Isenberg, Jeffrey Charles Hampton, Lauren J. Grous, Maryjo Bellew, Melissa W. Rand, Monique A. Bair, Robyn F. Pollack, Saul Ewing LLP, Philadelphia, PA, for Debtor.

United States Trustee, Philadelphia, PA, Dave P. Adams, USDOJ, Philadelphia, PA, Frederic Jay Baker, United States Trustee, Philadelphia, PA, for Trustee.

Kirk Burkley, The Bernstein Law Firm, Pittsburgh, PA, Richard Carlin, Zelenkofske Axelrod, LLC, Jamison, PA, Cooley LLP, New York, NY, Kenneth E. Aaron, Weir & Partners LLP, Philadelphia, PA, Josef W Mintz, Blank Rome LLP, Philadelphia, PA, Monique A. Bair, Adam H. Isenberg, Saul Ewing LLP, Philadelphia, PA, Leonard V. Fodera, Silverman & Fodera P.C., Philadelphia, PA, Robert Mark Bovarnick, Bovarnick & Associates, LLC, Philadelphia, PA, Michael J. Kurtis, Nelson Levine De Luca & Horst, Blue Bell, PA, Andrew L. Swope, Kirkpatrick & Lockhart Preston Gates El, Harrisburg, PA, James M. Matour, Hangley Aronchick Segal & Pudlin, Philadelphia, PA, Leslie Beth Baskin, Spector Gadon Rosen, Philadelphia, PA, for Other Parties.

OPINION

ERIC L. FRANK, Bankruptcy Judge.

TABLE OF CONTENTS

I. INTRODUCTION

II. FACTUAL AND PROCEDURAL BACKGROUND

A. The Debtors

B. The Bond Transaction

C. The Bankruptcy Filing

D. The Bond Litigation

E. The Bond Litigation Settlement Terms

F. The 9019 Motion

G. The Indenture Trustee's August 16, 2011 Notice to the Bondholder

H. The September 14, 2011 Hearing on the Rule 9019 Motion

I. The Plan and Disclosure Statement

1. a short chronology

2. the Plan

3. the Disclosure Statement

a. Part IV of the DS

b. Part VI.O. of the DS

c. The Chapter 11 Plan disclosures

J. Becker's Motion for Reconsideration of the 9019 Order

K. The Class Action Complaint in District Court

L. The Indenture Trustee's October 14, 2011 Notice to the Bondholders

M. The November 16, 2011 Order Modifying the 9019 Approval Order

N. The November 17, 2011 Telephone Conference

O. The December 2, 2011 Confirmation Hearing

P. The December 7, 2011 Orders

Q. The March 2, 2012 Hearing

III. DISCUSSION

A. The Legal Dynamics Created by the Indemnification Provisions of the Loan Agreement and the Indenture

1. the relevant provisions of the Loan Agreement and the Indenture

2. the impact of the global settlement negotiations on BNYM's rights under the exculpation, liability and indemnification provisions

B. The Parties' Basic Contentions

C. The Court Has Subject Matter Jurisdiction

1. the court had subject matter jurisdiction on December 2, 2011 to decide the contested matter relating to the confirmability of § 15.7 of the Plan

2. the court retained jurisdiction to decide the contested matter after entry of the Confirmation Order

D. BNYM's Two (2) Distinct Roles in the Settlement Process

1. Did BNYM have an unconditional right to condition its decision

to settle the Bondholders' dispute with LBH on the inclusion in the settlement of a release of Bondholder claims against BNYM?

2. Was the Third Party Release in the mutual best interests of both BNYM and the Bondholders?

E. The Third Party Release Cannot Be Approved

1. the 9019 Order does not control

2. the pre-solicitation disclosures were inadequate

a. Rule 3016(a)

b. the absence of information regarding the merits or value of the potential claims against BNYM

F. The Consequences of the Inadequate Disclosure

IV. CONCLUSION

I. INTRODUCTION

This chapter 11 case is in an odd procedural posture. Following a confirmation hearing, the court confirmed a joint chapter 11 plan in the above jointly-administered bankruptcy cases—but not entirely ! Presently before the court is the question whether the specific provision of the chapter 11 plan that was reserved for decision should now be approved and included as part of the confirmed plan.

The explanation for the division of the confirmation process into two (2) stages—with the court confirming most of the chapter 11 plan after the first confirmation hearing and determining the confirmability of the balance of the plan after a later hearing—requires a lengthy exposition of the convoluted procedural history of this case. In the end, it is a cautionary tale for reorganization lawyers, and perhaps, for the court as well.

In order to assist the reader in following the details, I begin with a brief overview of the procedural history.

On December 2, 2011, Debtors Lower Bucks Hospital, Lower Bucks Health Enterprises, Inc. and Advanced Primary Care Physicians (collectively, “the Debtors”), appeared at a hearing to consider the confirmation of their First Amended Joint Plan of Reorganization, As Modified (“the Plan” or, where appropriate, “the Confirmed Plan”). The Plan provided for nineteen (19) classes of claims (some impaired and some unimpaired) and for several unclassified classes of claims.

The Plan included a provision for a third-party release (“the Third Party Release”) in favor of The Bank of New York Mellon Trust Company, N.A. (“BNYM” or “the Indenture Trustee” or “the Bond Trustee”),¹ as Indenture Trustee for The Borough of Langhorne Manor Higher Education and Health Authority Hospital Revenue Bonds, Series of 1992 (Lower Bucks Hospital). The Third Party Release provided for the release of all claims of the bondholder-creditors who were classified as Class A3 creditors under the Plan. Leonard Becker (“Becker”), a Class A3 creditor, objected to confirmation of the Plan. His objection was based on the inclusion of the Third Party Release in the Plan. See11 U.S.C. § 524(e) (debtor's discharge “does not affect the liability of any other entity”); First Fidelity Bank v. McAteer, 985 F.2d 114, 118 (3d Cir.1993).

No other party in interest filed an objection to confirmation of the Plan.

At the December 2, 2011 confirmation hearing, all of the interested parties, including Becker, agreed that it was in no one's interest to delay confirmation of the Plan pending litigation regarding the propriety of the Third Party Release. There was a consensus that further delays arising from the litigation and a potential adverse decision on confirmation of the Plan might well jeopardize the Debtors' reorganization and the creditors' prospects for recovery on their claims. Consequently, all of the parties requested that the Plan be confirmed without a determination regarding the permissibility, enforceability and scope of the Third Party Release and that those issues be considered at a later hearing. It was agreed that the outcome of that later hearing regarding the Third Party Release would not affect the Confirmed Plan. In effect, the parties agreed that, at the subsequent hearing, the court would: (1) employ a legal fiction by analyzing the propriety of the Third Party Release as if the confirmation order had not been entered; and (2) then either sever the provision or re-attach it to the Confirmed Plan.

The court accepted the parties' suggestion and, on December 2, 2011, held the confirmation hearing on the Plan (treating the Plan as if it did not include the Third Party Release). Based on the record made at the hearing, the court ruled that the Plan (without the Third Party Release) should be confirmed pursuant to 11 U.S.C. § 1129(b). The confirmation order was entered a few days later, on December 7, 2011.

The subsequent, second confirmation hearing, devoted solely to the confirmability of the Third Party Release, was held and concluded on March 2, 2012. Following this hearing, Becker continued to assert jurisdictional, procedural and substantive objections to the incorporation of the Third Party Release in the Confirmed Plan.²

The issue before the court—the propriety of a third-party release contained in a chapter 11 plan of reorganization—arises in an unusual procedural posture, i.e., it is being decided after confirmation of the balance of the plan. The issue is complicated further by the facts that:

(a) the Third Party Release was included in a pre-confirmation settlement of an adversary proceeding between the Debtors and the Indenture Trustee;

(b) the settlement included terms for the treatment of the claims held by the bondholders (“the Bondholders”), treatment that the Indenture Trustee recommended the Bondholders accept; and,

(c) the court approved the adversary proceeding settlement pursuant to the process prescribed by Fed. R. Bankr.P. 9019.

As explained below, after careful consideration of the record and the parties' lengthy submissions, I conclude that the Third Party Release cannot be approved at this juncture due to inadequate disclosure to the Bondholders regarding the Third Party Release prior to the Bondholders' vote on the Plan. I will defer a final decision on whether the Third Party Release should be stricken from the Confirmed Plan until the parties have an opportunity to be heard on the possibility of a re-solicitation of the Bondholders.

II. FACTUAL AND PROCEDURAL BACKGROUND

A. The Debtors

As set forth in the Debtors' approved disclosure statement (Bky. Doc. # 1352),³ the lead Debtor, Lower Bucks Hospital (“LBH” or “the Debtor”), is a 186–bed, community hospital located in Bristol, PA. It has been operating since the 1950s and provides a range of medical services, including emergency services, heart care, maternity care, surgery, in-home services, wound care, sleep disorder services and psychological services.

LBH treats over 30,000 patients per year in its emergency room, performs more than 3,000 in-patient and out-patient surgical procedures and provides on-site services to approximately 110,000 people per year, as well as over 40,000 home visits through its home-care division. The hospital employs 350 nurses and is affiliated with over 490 physicians. It is a party to two (2) collective bargaining agreements, one (1) with the Nurses Association of Lower Bucks Hospital/The Pennsylvania Association...