In re PNW Healthcare Holdings, LLC
| Citation | 617 B.R. 354 |
| Decision Date | 20 May 2020 |
| Docket Number | Case No. 19-43754 (Jointly Administered) |
| Parties | IN RE: PNW HEALTHCARE HOLDINGS, LLC, et al., Debtors. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Western District of Washington |
Daniel J. Bugbee, DBS Law, Seattle, WA, Marcus A. Helt, Foley & Lardner LLP, Dallas, TX, Ashley M. McDow, Foley & Lardner LLP, Los Angeles, CA, Shane J. Moses, Foley & Lardner LLP, San Francisco, CA, Mark J. Wolfson, Foley & Lardner LLP, Tampa, FL, for Debtors.
Matthew Joseph Plahuta Johnson, DOJ-Ust, Seattle, WA, Martin L. Smith, Seattle, WA, for US Trustee.
This matter came before the Court on May 15, 2020, on the Joint Motion of the Debtors and the Official Committee of Unsecured Creditors to Determine Date to Assume or Reject Unexpired Leases of Residential Real Property and for Relief from Performance of Purported Non-residential Real Property Lease Obligations under §§ 365(d)(3)2 and 365(d)(4) ("Joint Motion"). On May 8, 2020, an objection ("Objection") to the Joint Motion was filed by Canyon Z, LLC and Canyon NH, LLC (collectively "Canyon Landlords"). On May 12, 2020, the Debtors and Official Committee of Unsecured Creditors ("Committee" and collectively "Movants") filed a reply in support of their Joint Motion ("Reply"). At the hearing, the Debtors, the Committee and the Canyon Landlords confirmed that there are no factual disputes in the record before the Court on the Joint Motion. Accordingly, the Court makes the following findings of fact and conclusions of law based on the pleadings and records filed in these bankruptcy cases.
The Debtors are for-profit entities. The majority of the Debtors are separate limited liability companies that operate one of the Debtors' fourteen individual skilled residential nursing facilities and one assisted living facility in the states of Washington, Idaho, and Oregon ("Facilities"). As of the date of the filing of the Debtors' bankruptcy cases, there were approximately 1182 residents ("Residents") in the Facilities with a capacity of 1508. See Decl. of W. Masterson ISO First Day Motions ¶ 5, ECF No. 5 ("First Masterson Decl."). Approximately 77% of the Residents are funded by Medicaid. The average stay for Medicaid Residents across the Facilities is 2.38 years. The range of average stays for the remaining 23% of Residents using other payers, ranges between 18.9 and 94.3 days for the past twelve months. See Decl. of W. Masterson ISO Motion Re: Real Property ¶¶ 4-6 & Ex. A, ECF No. 478 ("Second Masterson Decl.").
All the Facilities, except for the one owned and operated by Debtor North Auburn Health, LLC, are owned by certain special purpose entities (collectively "Formation Landlords"). EHC Elm Properties, LLC, Greenriver, Inc., the Randy Akrawi Trust dtd 12/21/2006, and the Ray & Sandra Akrawi Family Trust dtd 12/21/2006 (collectively "North Auburn Landlords") lease the facility operated by Debtor North Auburn Health, LLC pursuant to a lease dated January 1, 2019 ("Auburn Lease"). See Second Masterson Decl. ¶¶ 8-11 & Ex. D.
Although the documents related to that transaction are not in the court record, the Formation Landlords apparently lease the Facilities to the Canyon Landlords. Canyon Z, LLC in turn subleases the seven Facilities that are backed by Department of Housing and Urban Development ("HUD") loans3 to Debtor PNW Master Tenant I, LLC, under the terms of a Master Sublease and Security Agreement dated December 1, 2017 ("HUD Sublease"). Canyon NH, LLC subleases the remaining seven non-HUD Facilities4 to Debtor PNW Master Tenant II, LLC, under the terms of a separate Master Sublease and Security Agreement also dated December 1, 2017 ("Non-HUD Sublease"). The terms of the HUD Sublease and Non-HUD Sublease (collectively "Master Subleases") are substantially similar other than those provisions specifically concerning the HUD Sublease. See Second Masterson Decl. ¶¶ 8-10, Ex. B & C. The terms of the Master Subleases and the Auburn Lease each clearly acknowledge that the sublessees/lessees are skilled nursing or assisted living facilities. The Master Subleases include many details related to the operation of such facilities and the rights of the residents at the Facilities. See Second Masterson Decl. ¶ 15, Exs. B & C. All parties to both the Master Subleases and the Auburn Lease contemplated that the Facilities would be used as skilled nursing or assisted living facilities.
The Debtors continue to perform all other obligations under the Master Subleases and the Auburn Lease including the payment of postpetition rent to the Canyon Landlords and the North Auburn Landlords.5
Each of the Debtors, other than Cornerstone Healthcare Services, LLC and CRN Pool, LLC, filed Chapter 11 petitions on November 22, 2019. Cornerstone Healthcare Services, LLC and CRN Pool, LLC, filed their petitions on January 20, 2020. Orders have been entered directing joint administration of the Debtors' Chapter 11 cases under the lead case of PNW Healthcare Holdings, LLC. The Debtors remain in possession and no trustee has been appointed.
On February 7, 2020, the Canyon Landlords filed a Motion for Relief from Automatic Stay ("Relief from Stay Motion"). A preliminary hearing on the Relief from Stay Motion was held on March 12, 2020, and a final hearing is currently scheduled for June 2, 2020.
On February 13, 2020, the Debtors filed Debtors' Motion for Entry of an Order Extending the Time to Assume or Reject Unexpired Leases of Nonresidential Real Property ("Motion to Extend"). On February 27, 2020, the Committee filed a joinder in the Debtors' Motion to Extend. On March 10, 2020, the Court entered an Order Extending the Time to Assume or Reject Unexpired Leases of Nonresidential Real property, which extended "the period within which the Debtors may assume or reject the Debtors' unexpired leases of nonresidential real property by an additional 90 days, up to and including June 19, 2020." Order on Motion to Extend 2:22-24, ECF No. 410.
On March 30, 2020, the Court entered an Order Extending Exclusivity Periods for Filing and Confirming Plan. Pursuant to this order, the Debtors' exclusive period to file a plan was extended to May 20, 2020, and the period to solicit acceptances was extended to July 19, 2020. A Second Motion to Extend Exclusive Periods for Filing and Confirming Plan was filed on May 14, 2020, which is scheduled for a status conference on May 22, 2020.
In the Joint Motion, the Movants seek entry of an order (i) determining that the deadline pursuant to § 365(d)(4) to assume or reject leases of nonresidential real property does not apply to the Debtors' leases for their Facilities; and (ii) determining that the other obligations of lessors of nonresidential real property under § 365(d)(3) and (d)(4) are not applicable.6
Under Rule 6006, the Court has authority to determine whether the Master Subleases are nonresidential in the context of a contested proceeding pursuant to Rule 9014. Contrary to the suggestion of the Canyon Landlords, the Court's threshold determination regarding the nature of the Master Subleases is not a proceeding to determine the "extent of ... other interest in property" under Rule 7001(2), which generally includes "such matters as disputes as to the ownership of stock in the debtor, the extent of a debtor's interest in partnership property and whether mortgaged property belongs to the debtor." 10 Collier on Bankruptcy ¶ 7001.03[3] (16th ed. 2020). Therefore, Rule 7001(9), governing declaratory judgments, also is inapplicable. "If declaratory relief falls outside of the types covered by those specified clauses, an adversary proceeding is unnecessary." 10 Collier on Bankruptcy ¶ 7001.10 (16th ed. 2020); see In re Wallace , 122 B.R. 222, 226 (Bankr. D. N.J. 1990) ().
Section 365 of the Bankruptcy Code governs the assumption, assignment or rejection of executory contracts and leases of a debtor in bankruptcy. In the original version of § 365 enacted in the 1978 Bankruptcy Code ("1978 Code"), Congress attempted to balance the rights of debtors and non-debtor parties to these contracts and leases, reflecting some of the practical realities in the context of the different types of bankruptcy cases and different factual contexts (e.g., non-debtor leases, financial accommodations). In doing so, Congress gave the bankruptcy courts substantial discretion to address the needs of particular bankruptcy cases, especially regarding deadlines for assumption or rejection. See 1978 Code, Pub. L. No. 95-598, § 365, 92 Stat. 2549, 2574 (1978).
Relevant to the Joint Motion, under the 1978 Code, § 365(d) created a general approach to the deadlines for assumption or rejection of an executory contract or lease depending on the type of bankruptcy case. In a chapter 7 bankruptcy, a trustee was required to decide whether to assume or reject within 60 days unless the court extended such deadline based on a motion filed prior to the expiration of the 60-day period. In all other cases filed under chapters 9, 11 or 13, the trustee (or debtor in possession, as applicable) had until confirmation of the plan7 unless the court reduced such period on request of a party to such contract or lease. There was no distinction made in this deadline provision between residential and nonresidential property. Rather the distinction in the deadlines for assumption or rejection was based solely on the applicable bankruptcy chapter involved. This original...
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