In re Valley Health System, 6:07-BK-18293-PC.

• Decision Date: 20 February 2008
• Docket Number: No. 6:07-BK-18293-PC.,6:07-BK-18293-PC.
• Citation: 383 B.R. 156
• Court: U.S. Bankruptcy Court — Central District of California
• Parties: In re VALLEY HEALTH SYSTEM, a California Local Health Care District, Debtor.

383 B.R. 156

In re VALLEY HEALTH SYSTEM, a California Local Health Care District, Debtor.

No. 6:07-BK-18293-PC.

United States Bankruptcy Court, C.D. California, Riverside Division.

February 20, 2008.

Gary E. Klausner, Esq., H. Alexander Fisch, Esq., Stutman, Treister & Glatt, PC, Los Angeles, CA, for Debtor, Valley Health Care System, a California Local Health Care District.

William P. Smith, Esq., Nathan F. Coco, Esq., McDermott, Will & Emery LLP, Chicago, IL, for U.S. Bank National Association, as Indenture Trustee for the holders of Valley Health System Certificates of Participation (1993 Refunding Project) and Valley Health System District Revenue Bonds (Refunding and Improvements Project) 1996 Series A.

Christian L. Raisner, Esq., Weinberg, Roger & Rosenfeld, Alameda, CA, for SEIU-United Healthcare Workers West & Local 121 RN.

Leonard M. Shulman, Esq., Mark Bradshaw, Esq., Shulman Hodges & Bastian LLP, Foothill Ranch, CA, for Hemet Community Medical Group, Inc.

Allan H. Ickowitz, Esq., Nossaman, Guthner, Knox & Elliott, LLP, Los Angeles, CA, for Kaiser Foundation Hospitals.

Michael S. Winsten, Esq., Winsten Law Group, Laguna Niguel, CA, for Devida Renal Treatment Center.

MEMORANDUM DECISION

PETER H. CARROLL, Bankruptcy Judge.

U.S. Bank National Association, as Indenture Trustee for the holders of the Valley Health System Certificates of Participation (1993 Refunding Project) and the Valley Health System District Revenue Bonds (Refunding and Improvements Project) 1996 Series A ("U.S.Bank"), and SEIU-United Healthcare Workers — West and Local 121 RN (collectively, the "Unions") object to the petition filed by Valley Health System (the "District") under chapter 9 of the Bankruptcy Code.¹ The following appearances were entered at the hearing: Gary E. Klausner and H. Alexander Fisch for the District; William P. Smith and Nathan F. Coco for U.S. Bank; Christian L. Raisner for the Unions; Leonard M. Shulman and Mark Bradshaw for Hemet Community Medical Group, Inc. ("HCMG"); Allan Ickowitz for Kaiser Foundation Health; and Michael S. Winsten for Devida Renal Treatment Center. The court, having considered the objections and the District's response thereto, HCMG's comments, the evidentiary record, and arguments of counsel, makes the following findings of fact and conclusions of law² pursuant to Fed.R.Civ.P. 52, as incorporated into Fed. R. Bankr.P. 7052 and made applicable to contested matters by Fed. R. Bankr.P. 9014(c).

I. STATEMENT OF FACTS

The District is a public agency formed in 1946 under the State of California Local Healthcare District Law.³ The District encompasses 882 square miles in the San Jacinto Valley in Riverside County, California, and serves a population within the District of nearly 360,000. At its inception, the District operated only an, 18-bed hospital purchased from the city of Hemet, California. It now owns and operates the Hemet Valley HealthCare Center (the "Nursing Facility"), a 113-bed skilled nursing facility in Hemet, California, together with three acute hospitals-Hemet Valley Medical Center ("Hemet Hospital"), a 340-bed facility in Hemet, California; Menifee Valley Medical Center ("Menifee Hospital"), an 84-bed facility in Sun City, California; and Moreno Valley Community Hospital ("Moreno Valley Hospital"), a 95-bed facility in Moreno Valley, California. The Moreno Valley Hospital and its primary service area are situated outside the District's boundaries. Each of the hospitals provides comprehensive health services and 24-hour emergency medical services.⁴

The cost of the District's comprehensive health care system was financed, in large part, by two series of bonds issued by the District (collectively, the "Bonds"): (1) Valley Health System Certificates of Participation (1993 Refunding Project) and (2) Valley Health System District Revenue Bonds (Refunding and Improvements Project) 1996 Series A. There was approximately $84 million in principal and interest outstanding on the Bonds as of the date of the petition.

On December 13, 2007, the District filed a voluntary petition under chapter 9 in this case disclosing not more than 5,000 creditors holding claims in excess of $100 million. In conjunction with its petition, the District filed a Statement of Qualifications Under 11 U.S.C. § 109(c) ("Statement") certifying under penalty of perjury that it was eligible to be a debtor under chapter 9. In paragraph 5 of the Statement, the District declared:

The District believes it has been unable, prior to filing its chapter 9 petition, to negotiate with creditors to reach an agreement with the holders of at lease [sic] a majority in amount of each class to be impaired under the plan of adjustment ("Plan") because such negotiation is impracticable given the numerosity of the envisaged classes to be impaired under the Plan and the holders of claims in certain of those classes.⁵

On December 17, 2007, an order was entered directing notice of the commencement of the case, approving the form of the notice, and setting a deadline of January 17, 2008, for filing objections to the petition.⁶ On January 16, 2008, U.S. Bank timely filed an objection to the District's petition asserting that the District is ineligible for relief under chapter 9. U.S. Bank seeks dismissal of the petition on the grounds that the District has failed to establish that negotiation of an adjustment of its debt prior to the filing of the petition was impracticable as required by § 109(c)(5)(C). In its limited objection filed on January 17, 2008, the Unions do not question the District's eligibility to be a chapter 9 debtor nor its good faith in filing the petition, but simply ask that "the Court reject any premise that the bankruptcy resulted from the existence of the [collective bargaining agreement] or the District obligations to [Valley Health System] workers.⁷

On February 1, 2008, the District filed a reply to the objections of U.S. Bank and the Unions arguing that negotiations with its creditors prior to the filing of the petition would have been not only impracticable, but pointless given the liquidity crisis that threatened the District's continued operations and its inability to formulate a viable business plan upon which a meaningful plan of adjustment could be structured prior to the petition date. On February 4, 2008, HCMG, an unsecured creditor holding claims of approximately $4.5 million, filed a response stating that it did not support a dismissal of the petition and requested that the court set a deadline for the filing of a plan pursuant to § 941. On February 7, 2008, the court conducted a hearing on the objections at which time the Unions conceded that they were not seeking dismissal of the District's petition. At the conclusion of the hearing, the matter was taken under submission.

II. DISCUSSION

This court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157(a) and 1334(b). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O). Venue is appropriate in this court. 28 U.S.C. § 1409(a).

Section 921(c) states that "[a]fter any objection to the petition, the court, after notice and a hearing, may dismiss the petition if the debtor did not file the petition in good faith or if the petition does not meet the requirements of this title." 11 U.S.C. § 921(c). If the court does not dismiss the petition under § 921(c), then it must order relief under chapter 9. 11 U.S.C. § 921(d). Despite the permissive language of the statute, § 921(c) has been construed as requiring dismissal of a petition filed by a debtor who is not eligible for relief under chapter 9. In re County of Orange, 183 B.R. 594, 599 (Bankr.C.D.Cal. 1995) ("Although the language of § 921(c) is permissive, the case law indicates that § 921(c) `must be given a mandatory effect if the defect in the filing is in the debtor's eligibility to file Chapter 9.'" (citation omitted)). See generally 6 Collier on Bankruptcy ¶ 921.04[4] at 921-7 (Alan N. Resnick & Henry J. Sommer eds., 15th ed.2007) [hereinafter Collier].

To qualify for relief under chapter 9, an entity must meet the statutory criteria set forth in § 109(c) which states:

An entity may be a debtor under chapter 9 of this title if and only if such entity —

(1) is a municipality;

(2) is specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter;

(3) is insolvent;

(4) desires to effect a plan to adjust such debts; and (5)(A) has obtained the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;

(B) has negotiated in good faith with creditors and has failed to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;

(C) is unable to negotiate with creditors because such negotiation is impracticable; or

(D) reasonably believes that a creditor may attempt to obtain a transfer that is avoidable under section 547 of this title.

11 U.S.C. § 109(c). The burden of establishing eligibility under § 109(c) is on the debtor. See County of Orange, 183 B.R. at 599 ("The burden of proving eligibility under § 109(c) is on the party filing the petition."); In re Sullivan County Reg'l Refuse Disposal Dist., 165 B.R. 60, 72-73 (Bankr.D.N.H.1994) ("To qualify for Chapter 9 protection, the debtor must affirmatively establish it meets each of the requirements of 11 U.S.C. § 109(c)....").

Neither U.S. Bank nor the Unions question specifically the District's good faith in filing the petition.⁸ Nor is there an issue as to whether the District has satisfied the eligibility requirements of § 109(c)(1), (2), (3) or (4), i.e., that the District (1)...