Ky. Emps. Ret. Sys. v. Seven Counties Servs., Inc. (In re Seven Counties Servs., Inc.)

Decision Date30 May 2014
Docket NumberBankruptcy No. 13–31442(1)(11).,Adversary No. 13–03019.
Citation511 B.R. 431
PartiesIn re SEVEN COUNTIES SERVICES, INC., Debtor. Kentucky Employees Retirement System, Plaintiff v. Seven Counties Services, Inc., Defendants.
CourtU.S. Bankruptcy Court — Western District of Kentucky


Tyson A. Crist, Daniel R. Swetnam, Ice Miller LLP, Victoria E. Powers, Columbus, OH, for Plaintiff.

David M. Cantor, Paul J. Hershberg, James Edwin McGhee, III, Charity Bird Neukomm, Seiller Waterman LLC, Louisville, KY, for Defendants.


JOAN A. LLOYD, Bankruptcy Judge.

This matter came before the Court for trial on the Complaint of Kentucky Employees Retirement System (KERS) against Seven Counties Services, Inc. (“Seven Counties,” or “Debtor) for Declaratory Judgment, Dismissal of Chapter 11 Bankruptcy Case and Injunctive Relief, as well as the Debtor's Amended Motion for Approval of Debtor's Rejection of a Potentially Executory Contract with KERS (“Debtor's Amended Motion to Reject), Doc. No. 103, in the main bankruptcy case. For the following reasons, the Court will grant judgment in favor of Seven Counties on each Count of KERS's Complaint and grant the Debtor's Amended Motion to Reject. A Judgment and Order accompany this Memorandum Opinion.


This case involves Seven Counties' struggle to rehabilitate its financial condition through the United States Bankruptcy Code. Seven Counties is a charitable organization which provides behavioral health services annually to approximately 33,000 persons living in Bullitt, Henry, Jefferson, Oldham, Shelby, Spencer and Trimble Counties in the Commonwealth of Kentucky. As of the date the bankruptcy Petition was filed, it provided behavioral health and development services at twenty-one (21) dedicated service locations and one hundred twenty (120) school and community service sites in the Seven Counties area. It is the largest non-hospital, non-profit entity in the Louisville Metro area. As a non-profit, charitable organization, all of Seven Counties' revenues in excess of direct costs of its maintenance are devoted to the implementation of its behavioral health programs. It has operated for over thirty-five years and has thoroughly integrated itself into its service area as a primary safety net for persons with severe mental illnesses, children with severe emotional and behavioral disorders, persons with alcohol and drug addictions, and persons with developmental and/or intellectual disabilities.

Seven Counties owes its existence to a change in the delivery of this safety net function initiated many years ago. President John F. Kennedy signed into law the Community Health Act of 1963 (the “Act), which was designed to begin the privatization of mental health services. This ended the historical treatment model based upon state run programs that primarily relied upon institutionalizing the nation's mentally ill citizens. President Kennedy recognized and designated the mental health of the citizenry as a national priority. His goal was “comprehensive community care” by using community based treatment through local non-profit corporations as opposed to the historic government provided institutional care. The Act provided federal funds to public or nonprofit agencies to address mental health at the community level.

The Commonwealth of Kentucky responded in 1964 by passing the Community Mental Health Act now revised and encompassed in Chapter 210 of the Kentucky Revised Statutes. The metamorphosis from state-run mental health services to a community-based, private non-profit structure has been a monumental success insofar as it involves the treatment of society's most vulnerable persons. However, issues arising from legislation enacted by the Kentucky General Assembly, coupled with the transition from public to private delivery of behavioral health services, created a legal wrinkle that has amplified over time and now threatens Seven Counties' existence as an operating entity.

The Court's Findings of Fact and Conclusions of Law are necessarily detailed as the matters before the Court cover some fifty-eight years of history that the Court deems essential to its ruling. To relieve the casual reader of the analytical labors that follow, the Court's ruling is summarized as follows:

1) Seven Counties is a private non-profit corporation organized under Chapter 273 of the Kentucky Revised Statutes 1 and qualified under 26 U.S.C. § 501(c)(3) of the Internal Revenue Code as a tax exempt entity. While Seven Counties operates as a Community Mental Health Center, as further described herein, and is admittedly an entity subject to regulation and oversight by the Kentucky Cabinet for Health and Family Services (“Cabinet), it is not a “governmental unit” as defined in 11 U.S.C. § 101(27);

2) Seven Counties is a “person” under 11 U.S.C. § 101(41) and is therefore eligible for Chapter 11 relief;

3) KERS's demand for a permanent injunction pursuant to 28 U.S.C. § 363(d) and 28 U.S.C. § 959 requiring Seven Counties to continue post-petition “employer required contributions” under K.R.S. Chapter 61 is denied; and

4) Seven Counties is entitled to relief under 11 U.S.C. § 365 in that there exists a contractual relationship between Seven Counties and KERS which may be rejected by Seven Counties in the exercise of its sound business judgment.

The claims raised by Seven Counties in response to KERS's claims also include a request for conclusions of law as to whether Seven Counties is eligible to participate in KERS, whether KERS is a governmental plan, and whether the provisions of KERS run afoul of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001, et. seq. Although this Opinion includes findings of fact relevant to that request, the Court declines to render conclusions of law as unnecessary given the above rulings.


This Court has jurisdiction over the matters alleged herein pursuant to 28 U.S.C. § 1334(a) and (b) and Title 11 of the United States Bankruptcy Code. Venue is proper in the Court pursuant to 28 U.S.C. §§ 1408 and 1409. These matters are core proceedings under 28 U.S.C. § 157(b)(2).


On April 4, 2013 (the “Petition Date), Seven Counties filed its Voluntary Petition for relief under Chapter 11 of the Bankruptcy Code commencing Case No. 13–31442. The procedural history of the bankruptcy main case and this adversary proceeding are quite involved and extensive.

Currently at issue are the demands for relief by KERS in Counts I, II and III of this Adversary Proceeding and Seven Counties' Amended Motion to Reject an executory contract with KERS and/or Kentucky Retirement System (KRS). On June 10, 2013, KERS filed its Complaint in accordance with this Court's May 8, 2013 Order commencing Adversary Proceeding No. 13–03019 (Adversary 3019). Contemporaneously therewith, KERS filed a Motion for Preliminary Injunction to Compel Seven Counties to Comply with its Statutory Obligations, based on Count III of the Complaint, to compel Seven Counties to fulfill what it claimed were its postpetition statutory obligations under K.R.S. Chapter 61 and K.A.R. Title 105. In addition, KERS and KRS filed their Motion to Dismiss Adversary Proceeding 3014 (Adversary 3014) 2 and Seven Counties filed its Motion to Dismiss this Adversary Proceeding.

On September 10, 2013 through September 18, 2013, a hearing was held on the Motions to Dismiss, as well as the Motion for Preliminary Injunction. The Court issued its oral ruling from the bench. The Court found that KERS failed to meet its burden regarding the four factors required for a grant of a preliminary injunction: (1) the likelihood that it would succeed on the merits at a trial in the future; (2) whether KERS would suffer irreparable injury without the issuance of a preliminary injunction; (3) whether the injunction would harm others; and (4) whether the public interest would be served by the Court imposing the injunction. Unsecured Creditor's Comm. Of DeLorean Motor Co. v. DeLorean, 755 F.2d 1223, 1228 (6th Cir.1985).

The Court stated that it was not consolidating the trial on the merits with the hearing on the Motion for Preliminary Injunction under Bankruptcy Rule 7065, that this matter would go to trial, and that the evidence introduced was preserved for trial. This was memorialized in an Order filed September 20, 2013, as well as in the Memorandum Opinion and Order filed on November 8, 2013.

At the preliminary injunction hearing the Court found that Seven Counties is a Kentucky non-profit corporation and is designated as a community mental health organization under Kentucky Revised Statutes. By executive order, Seven Counties became a participant in KERS. Upon becoming a participant, Seven Counties was required to collect its employees' contributions for KERS and make its own contribution on behalf of the employees. The Court further found that KERS requires contributions from participating employers in excess of what Seven Counties can afford.

The Court found that nothing in the Kentucky Revised Statutes allows the governor to put a member on the board of Seven Counties, the General Assembly does not appropriate funds directly for the payment of Seven Counties' operations, and Seven Counties is an independent entity and owns its own real estate. The Court further found that the manner in which Seven Counties is designated as a community mental health center under the Kentucky Revised Statutes indicates that it is not a governmental entity. The primary remedy for the state's displeasure with the actions of a Community Mental Health Center is de-designation as a Community Mental Health Center by the Cabinet. De-designation is unnecessary for state controlled entities.

On November 8, 2013, the Court entered a Memorandum Opinion and accompanying Order in this adversary proceeding and Adversary 3014 denying each of the parties' Motions to...

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