In re Westlake Prop. Holdings, LLC

• Decision Date: 24 September 2019
• Docket Number: Case No. 19-22878
• Citation: 606 B.R. 772
• Parties: IN RE: WESTLAKE PROPERTY HOLDINGS, LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

606 B.R. 772

IN RE: WESTLAKE PROPERTY HOLDINGS, LLC, et al., Debtors.

Case No. 19-22878

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed September 24, 2019

Attorneys for Trustee: Robert M. Fishman

Attorney for Village of Melrose Park: Kevin Morse

Attorneys for SRC Hospital Investments II, LLC: John Weiss, Richard P. Darke

MEMORANDUM OPINION

Deborah L. Thorne, United States Bankruptcy Judge

This is a chapter 7 case filed by Pipeline-Westlake Hospital, LLC (Westlake) and its related entity, Westlake Property Holdings, LLC. Westlake is located in the Village of Melrose Park (Village) which filed a motion to dismiss these cases as well as an emergency motion for the entry of an order that the automatic stay is not applicable pursuant to 11 U.S.C. § 362(b)(4). The parties have fully briefed each motion and for the reasons discussed below, the motion to dismiss is denied. The motion seeking a determination that the automatic stay does not apply to the Village under section 362(b)(4) is also denied.

1. Background

The facts are drawn from the parties' papers and other materials on the docket of the bankruptcy case. No facts pertinent to these motions are in dispute.

Westlake operated a community hospital in the Village for over 100 years. In late 2018, the for-profit group, SRC Hospital Investments II, LLC (SRC), purchased Westlake and its related entity along with two other Chicago area hospitals. At the time SRC sought to purchase Westlake, it made certain representations to the Village and to the Illinois Health Facilities Review Board (Review Board)¹ , including that it would continue to serve indigent patients and maintain the Hospital for at least two years. Based on those representations, the purchase was approved by the Review Board.

Several months after the purchase closed, SRC announced that Westlake was not financially viable and began to facilitate a closing of the Hospital by filing a Discontinuation Application with the Review Board. On April 30, 2019, the Review Board unanimously approved the Discontinuation Application.

a. The State Court Proceedings

Prior to the Review Board's consideration of the Discontinuation Application, the Village filed a complaint in the Circuit Court of Cook County (Circuit Court) against Westlake and its non-debtor affiliates Pipeline Health System LLC, SRC, TWG Partners LLC, Nicolas Orzano and Eric Whitaker² alleging fraudulent misrepresentation, civil conspiracy and violation of several municipal codes in connection with Westlake and SRC's initial application to purchase Westlake. The Circuit Court entered a temporary restraining order in favor of the Village and against the defendants which enjoined them from closing Westlake. The Illinois Appellate Court reversed and remanded the case back to the Circuit Court, finding that the Village failed to demonstrate that it had an ascertainable right endangered by the defendants' conduct.

On May 2, the Village, upset with the decision of the Review Board authorizing the Discontinuation Application, filed a second action in the Circuit Court against the Review Board, Westlake and SRC seeking judicial review of the Review Board's action under the Illinois Administrative Review Law (Review Action).³ Among the allegations in the Review Action, the Village alleged that the Review Board was not properly constituted at its April 30 meeting. Following a hearing on May 7, 2019, the Circuit Court entered an order (May 7 Order) temporarily enjoining Westlake and SRC from discontinuing or modifying any medical services offered by Westlake.

Specifically, the May 7 Order enjoined Westlake, SRC and any of their employees or agents from among other things:

• Taking any action pursuant to the Discontinuation Application, including, but not limited to closing Westlake;

• Discontinuing any medical services offered by Westlake on April 30, 2019, or modifying the scope of those services; and

• Creating conditions that change the status quo, including but not limited to terminating employees.

The May 7 Order also authorized the Cook County State's Attorney to intervene as a plaintiff on the side of the Village. SRC and Westlake appealed the May 7 Order. The appeal is currently pending before the Illinois Appellate Court.

On August 6, 2019, while the appeal was pending, Westlake and Westlake Property Holdings, LLC, filed voluntary chapter 7 petitions in the Bankruptcy Court for the District of Delaware. On that same day, the Delaware Bankruptcy Court entered an order authorizing the chapter 7 trustee to continue operating Westlake through August 13 without prejudice to further extensions as might be requested by the chapter 7 trustee.

On August 8, the Village and the Cook County State's Attorney moved in the Circuit Court to have SRC held in contempt for violating the May 7 Order by using the bankruptcy case to "evade the Court's Stay and shutter the hospital" [Dkt. No. 23, Exhibit C]. In addition, the emergency motion asked for daily fines of at least $200,000 for violation of the Order. In response, SRC filed its own motion in the Review Action to stay proceedings pending the outcome of the Westlake bankruptcy proceedings.

Although no stay of the May 7 Order was entered pending the appeal, the Illinois Appellate Court entered an order on August 13 staying all proceedings pending resolution of the bankruptcy proceedings of Westlake. On the same day, the Delaware Court transferred the cases to this district. On August 14, the Circuit Court stayed proceedings in conjunction with the administrative review action pending a ruling from this court on the instant motions.

b. Westlake's Financial Condition

In response to the Village's Motion to Dismiss, Westlake has described its financial condition as causing the need for bankruptcy relief. James Edwards, the CEO of SRC, listed the many indications of financial strain under which Westlake was operating during the first half of 2019. [Dkt. 23, Exhibit 5A]. These include:

• Loss of $4,000,000 in state funding;

• Withdrawal of $500,000 in Village funding for the Westlake redevelopment plan;

• Losses of $1 million per month in Westlake operations in 2018;

• Decreases in occupied beds by February to only 50%, to 30% in April and to 20% in May;

• Resignation of approximately 45 staff members while the Discontinuation Application was pending before the Review Board;

• Loss of approximately $2,300,000 in April;

• Loss of approximately $2,500,000 in May;

• Loss of approximately $2,700,000 in July 2019; and

• Failure to locate a purchaser of the Hospital as a going-concern;

2. Discussion

The Village filed a motion to dismiss this case under section 305(a) of the Bankruptcy Code maintaining that the interests of creditors and the debtor would be better served by dismissal or suspension and alleging that the petition was filed in bad faith. Additionally, the Village filed an emergency motion for the entry of an order that the automatic stay is not applicable to the Review Action and contempt proceeding. For the reasons stated below, the motion to dismiss is denied. Further, the Village is not exempt from the automatic stay under section 362(b)(4) and thus cannot pursue it claims against Westlake in the Review Action.

a. The Motion to Dismiss

(1) Effect of the State Court Injunction

The motion to dismiss first raises the question of whether an apparently insolvent debtor can file a chapter 7 case in light of an existing state court injunction prohibiting the debtor from closing its doors. To answer this question, the court first looks at the constitutional authority provided to Congress to enact bankruptcy laws and those laws found in the Bankruptcy Code which allow eligible debtors to file.

The right of Congress to provide for laws related to bankruptcy relief is found in the United States Constitution. U.S. Const. Art.I, § 8, cl. 4. Congress has exercised this responsibility by adopting the Bankruptcy Code. 11 U.S.C. § 101 et. seq . Federal district courts are given exclusive jurisdiction over bankruptcy cases and the filing of bankruptcy petitions. See In re Allied Products Corp. , 288 B.R. 533, 535 (Bankr. N.D. Ill. 2003) ; Gonzales v. Parks , 830 F.2d 1033, 1035 (9th Cir. 1987) ; 28 U.S.C. § 1334(a). The district court may refer certain "core" cases to the bankruptcy court for final judgment under 28 U.S.C. § 157(a) - (b)(1). In the Northern District of Illinois, these cases are referred to the bankruptcy court "[a]s a matter of course." See FTI Consulting, Inc. v. Merit Mgmt. Grp., LP , 476 B.R. 535, 537 (N.D. Ill. 2012) ; In re Neumann Homes, Inc., 414 B.R. 383, 385–86 (N.D. Ill. 2009) (citing L.R. 40.3.1 ); In re Hedstrom Corp. , Nos. 04–38543 & 05 C 6888, 2006 WL 1120572, at *1 (N.D. Ill. Apr. 24, 2006) (same).

Section 109 of the Bankruptcy Code, not state law, defines which entities are eligible to seek relief as debtors in bankruptcy. 11 U.S.C. § 109. State laws cannot restrict statutory eligibility to file a bankruptcy petition and to pursue bankruptcy relief under the Bankruptcy Code. See State of Ill., Dep't of Revenue v. Schechter , 195 B.R. 380, 385 (N.D. Ill. 1996). Similarly, a party may not use a state court injunction to support dismissal of a bankruptcy petition; only federal courts hold the remedies to challenge the filing of a bankruptcy petition. See In re Medifacts Intern., Inc. , 2007 WL 521917, at *1 (Bankr. D. Del. 2007) ; In re Emerald Acquisition Corp. , 170 B.R. 632, 644 (Bankr. N.D. Ill. 1994) ; In re Sino Clean Energy, Inc. , 901 F.3d 1139, 1142 (9th Cir. 2018) ; In re Kreisers, Inc. , 112 B.R. 996, 999 (Bankr. D.S.D. 1990).

In the May 7 Order, the Circuit Court enjoined the Debtor and SRC from "taking any action pursuant to the ... Discontinuation Application, ... discontinuing any medical service offered by [the Debtor] on April 30, 2019, ... modifying the scope of those services[, or] creating conditions that change the status quo." The Village suggests that the bankruptcy petition was...