Source: https://www.abi.org/abi-journal/bapcpa-health-care-lenders-beware
Timestamp: 2020-08-05 04:50:51
Document Index: 512314771

Matched Legal Cases: ['§363', '§333', '§330', '§362', '§1128', '§363', '§363', '§1101', '§101', '§1104', '§333', '§1104', '§333', '§1104', '§333', '§3001', '§3058', '§1104', '§330', '§1103', '§503', '§1105', '§704', '§1102', '§351', '§1106', '§362', '§362', '§105', '§105', '§362', '§106', '§727', '§102', '§707', '§102', '§1325', '§312', '§727', '§316', '§521', '§307', '§522', '§322', '§522', '§322', '§522', '§201', '§502', '§201', '§502', '§306', '§306', '§1325', '§327', '§327', '§506', '§327', '§506', '§1221', '§363', '§1221', '§1221']

BAPCPA Health Care Lenders Beware | ABI
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BAPCPA Health Care Lenders Beware
With the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the Bankruptcy Code for the first time adopts specific health care bankruptcy provisions. In doing so, it may, along with certain other more general amendments, have a significant effect not only on health care providers but their lenders and unsecured creditors, who may find their positions further compromised. In particular, in structuring, booking and working out loans to health care entities, lenders may need to consider or factor in whether BAPCPA creates significant new priority claims that could prime their loan positions or threaten the value of their collateral in receivables and other assets. As a result, lenders may consider (1) the advisability of taking liens on more property that would not be primed by the new priority claims, (2) adjusting borrowing bases and (3) accepting and even encouraging more out-of-court restructurings—including leaving something on the table—to the extent a health care bankruptcy may have been made a "less" attractive alternative by BAPCPA.
This column highlights five issues raised by BAPCPA that may be of particular interest to health care lenders and other creditors and will likely have an impact on collateral collection and values and/or amounts available for recoveries for health care lenders and general unsecured creditors: (1) the scope of the role of the patient care ombudsman to be appointed in health care business bankruptcies and the attendant administrative costs relating to that role, (2) the impact of other potentially significant additional administrative expenses imposed by BAPCPA, particularly relating to patient record retention and patient transfers, (3) the effect on receivables of a new exception to the automatic stay granted to the Department of Health and Human Services, (4) the effect of provisions of BAPCPA relating to personal bankruptcies on health care providers' self-pay patient receivables, and (5) the impact of the BAPCPA requirement that nonprofit entities comply with any applicable nonbankruptcy laws when transferring assets pursuant to a §363 sale or a plan.
Increased Procedural Requirements and Administrative Expenses
1. Patient Care Ombudsman. Section 1104 of BAPCPA (through new §333 of the Code) requires the appointment of a disinterested patient care ombudsman to monitor the quality of patient care provided by a health care business2 in bankruptcy and to represent the interests of the patients of the health care business unless the court finds that the appointment of such ombudsman is not necessary under the specific facts of the case. The U.S. Trustee is to appoint the patient care ombudsman within 30 days after the commencement of the bankruptcy (although the U.S. Trustee may not appoint itself ombudsman). If the debtor is a health care business that provides long-term care, then the U.S. Trustee may select the State Long-Term Care Ombudsman appointed under the Older Americans Act of 1965 for the state in which the case is pending to serve as the patient care ombudsman.3 The Interim Rules for implementing the provisions of BAPCPA relating to health care businesses issued and modified by the Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States provide that even if the court has previously determined that the appointment of a patient care ombudsman is not necessary or has previously terminated the appointment of a patient care ombudsman, the court, on a motion by the U.S. Trustee or any party in interest, may order the appointment of a patient ombudsman at any time during a case if the court finds that the appointment of a patient ombudsman has become necessary.4
BAPCPA requires the patient care ombudsman to monitor the quality of patient care provided to patients of the health care business to the extent necessary under the circumstances, including interviewing patients and physicians.5 Every 60 days at a hearing or in writing and after notice to the parties in interest, the ombudsman must report to the court regarding the quality of patient care provided to patients of the debtor. If the ombudsman determines that the quality of patient care provided to the debtor's patients is declining significantly or is otherwise being materially compromised, the ombudsman must file with the court a motion or written report, with notice to the parties in interest, immediately upon making such determination.6 The experience of the state ombudsmen appointed pursuant to the Older Americans Act of 19657 may serve as a guide of sorts for patient care ombudsmen in carrying out their responsibilities under BAPCPA.8 BAPCPA, however, does not establish any standards by which the patient care ombudsman is to evaluate the quality of patient care.
BAPCPA also provides that the patient care ombudsman is to be compensated as a "professional person" by the debtor-in-possession (DIP) or trustee pursuant to §330(a)(1) of the Code.9 While there is no specific provision allowing the patient care ombudsman to hire counsel or other professionals, the retention and payment of professionals will likely prove to be essential if the ombudsman is to be successful in monitoring the impact of the entire bankruptcy process on patient care. There is also no specific guidance as to any exposure to or protections (including immunity or indemnification) for the patient care ombudsman in relation to monitoring the quality of health care services. Given the rather open-ended nature of the patient care ombudsman's role, debtors and trustees could incur substantial administrative expenses relating to the compensation of the ombudsman and its professionals, the expenses relating to the performance of the ombudsman's duties (including giving notice, interviewing patients, etc.), and the expenses associated with addressing or implementing any of the ombudsman's recommendations with respect to patient care that might be ordered by the court. (While health care debtors and lenders may give serious consideration to attempting to demonstrate to the bankruptcy court that the parties in interest are sufficiently focused on patient issues that the appointment of an ombudsman is unnecessary, the success of such an argument is open to question.)
2. Increased Administrative Expenses. BAPCPA creates other administrative expense priorities that could further compromise the collateral position of lenders and creditors. In particular, BAPCPA grants administrative expense priority to the actual and necessary costs and expenses of closing a health care business whether incurred by a trustee, federal agency, or department or agency of a state or political subdivision, including the costs and expenses of disposing of patient records and the costs and expenses of transferring of patients.10
These additional expenses may be significant. With respect to the transfer of patients, BAPCPA requires and arguably creates a duty for a trustee or debtor to use all reasonable and best efforts to transfer patients from a health care business that is in the process of being closed to an appropriate health care business that (a) is in the vicinity of the health care business that is closing, (b) provides services that are substantially similar to those provided by the health care business that is in the process of being closed and (c) maintains a reasonable quality of care.11 Similarly, while BAPCPA's provision for the disposal of patient records may arguably be intended to relieve the estate of the cost of retaining those records, the procedures for disposing of patient records either by turning them over to patients or their insurers, depositing them with an appropriate federal or state agency, or destroying them, may result in additional expense to the estate. BAPCPA requires that the trustee or debtor publish a notice at least 365 days in advance of its intent to destroy patient records, send notice during the first 180 days of the one-year period to each patient or his/her appropriate insurance carrier directly regarding the claiming or disposal of the patient's records, and make a written request to each appropriate federal agency to accept deposit of any unclaimed records. The trustee may then destroy any unclaimed patient records for which an appropriate federal agency has not granted a request to deposit the records.12 The Interim Rules require that the court approve the form of any notice of intent to dispose of patient records. The Interim Rules also require that the debtor or trustee file a report no later than 30 days after the destruction of patient records certifying that the unclaimed records have been destroyed and explaining the method used to effect destruction.
These combined additional administrative expenses would seem to make bankruptcy a more costly and arguably less-attractive option for health care entities and their unsecured creditors. Faced with the possibility of substantially larger carve-outs to pay for additional administrative expenses, health care lenders may favor an orderly out-of-court liquidation to bankruptcy.
Limits to Collections and Collateral Value
Other provisions of BAPCPA relating to health care businesses in bankruptcy may pose additional challenges to cash flows available to operate the health care business and to collateral and/or recoveries for lenders and creditors.
3. Exception to the Automatic Stay for HHS. Section 1106 of BAPCPA provides an exception to the automatic stay under Code §362 by permitting the Secretary of Health and Human Services (HHS) to exclude a debtor from participation in the Medicare program or any other federal health care program (as defined in §1128B(f) of the Social Security Act).13 The amendment, in addition to threatening a provider with the loss of all future Medicare payments, is intended to make it harder for Medicare providers to avoid penalties and repayment of pre-petition Medicare overadvances by declaring bankruptcy. Through its power to exclude a provider from the Medicare program, BAPCPA gives to HHS a greater power to also compel recoupment and/or set off against pre-petition overpayments.14 These changes may also have the effect of squeezing health care providers at the beginning of a case and ultimately denying those receivables to health care entities and their creditors, including particularly lenders who may have a collateral interest in such receivables.
4. Self-pay Patient Receivable Collections and Collateral. As consumer-focused legislation on the one hand, BAPCPA is generally viewed as making it more difficult for individuals (including those with health care debts) to avoid their debts through discharge in bankruptcy, thereby theoretically or potentially reducing patient bankruptcy filings and related chargeoffs while increasing collections;15 on the other hand, certain provisions of BAPCPA may also put some limited pressure on health care providers (and creditors generally) to compromise their claims and thus may negatively impact patient receivables collateral. One provision in particular, designed to promote alternative dispute resolution, provides that an unsecured creditor may have its claim reduced by up to 20 percent if an approved nonprofit budget and credit counseling agency proposes an alternative repayment plan in which the consumer-debtor agrees to pay at least 60 percent of that creditor's debt during the term of the loan (or any reasonable extension thereof) and that creditor unreasonably refuses to negotiate that repayment plan. The alternative payment plan must be offered at least 60 days before the filing of a bankruptcy petition, and no part of the debt can be nondischargeable.16 Further language in BAPCPA indicates that the debtor (here the patient) has the rather high burden of proving by clear and convincing evidence that (1) the creditor unreasonably refused to consider the debtor's proposal and (2) the proposed alternative repayment schedule was made prior to the expiration of the 60-day period.17 It is unclear whether a creditor that negotiates but does not accept a repayment plan will be subject to a motion to reduce its claim.
While self-pay collections may not be the most significant collectibles or collateral in a health care bankruptcy, particularly when combined with new protections given to secured consumer lenders,18 these provisions can further limit collections and claims against self-pay patient receivables.
5. Nonprofit Health Care Business Sales. Finally, new requirements relating to the sale or transfer of assets by nonprofit entities may affect the ability of debtors and creditors to realize the full value of collateral in facilities and related real property in nonprofit health care bankruptcies. Section 1221 of BAPCPA (effective as of April 20, 2005) requires that when a nonprofit entity sells assets pursuant to §363 of the Code or transfers assets pursuant to a plan, such sale or transfer of assets must comply with applicable nonbankruptcy law governing the transfer of property by nonprofits.19 The same section of BAPCPA also grants the attorneys general of the states in which a nonprofit entity is incorporated and does business standing to be heard in the bankruptcy court on issues relating to sale and transfer of assets.20 BAPCPA is not to be construed to require the approval of any other court for the transfer of property by a nonprofit entity.21
Under the old law, it was unclear whether nonprofit debtors needed to obtain only the approval of the bankruptcy court for a sale transaction, or whether nonprofit debtors also needed to comply with otherwise applicable nonbankruptcy law. Some courts permitted nonprofit debtors to transfer assets through a §363 sale without complying with state laws and regulations, even over the objection of state attorneys general and regulators, while other courts required compliance with both the Code and applicable nonbankruptcy law.22 While BAPCPA appears to offer some clarity on the question of whether compliance with applicable nonbankruptcy law is required and makes clear that a trustee or debtor need not obtain the approval of any court other than the bankruptcy court for the transfer of property by a nonprofit debtor, nonprofit health care debtors will likely find disposing of property more difficult, particularly if one or more state attorneys general oppose the sale or transfer of property or insist on compliance with applicable nonbankruptcy law, including such things as increased notice and the opportunity for public comment on any proposed sale, and restrictions on (and possible objections to) the transfer of assets based on theories of charitable trust, including whether the proposed sale is consistent with or the best alternative to meet the original charitable mission of the health care entity. In addition, compliance with additional applicable nonbankruptcy laws when selling or transferring assets could not only impede highest-and-best-offer sales, but may result in additional administrative costs to the estate.
While health care lending has not been turned on its head, some of the rules have been affected by BAPCPA. For health care providers, their lenders and unsecured creditors, the consumer provisions of BAPCPA mandating credit counseling, establishing a means test for determining debtors' eligibility for chapter 7 and the amount of income available to pay unsecured creditors under chapter 13 plans, preventing serial or repeat filings, limiting the use of the homestead exemption, and making dismissal of cases easier for failure to file certain documents (including tax returns) offer the possibility that providers will experience fewer patient bankruptcy filings and chargeoffs, and less erosion of patient receivables collateral—although that possibility is somewhat tempered by other provisions of BAPCPA that require creditors to negotiate their claims with would-be debtors prior to bankruptcy or face a possible 20 percent reduction of their claims in a bankruptcy proceeding and that grant additional protections to secured creditors and establish new claim priorities. On the other hand, and probably more important to health care lenders, BAPCPA gives to HHS a powerful new tool for squeezing health care entities in bankruptcy and compelling recoupment of pre-petition Medicare overadvances, thereby potentially impacting receivables collateral. Further, BAPCPA's provisions relating to the appointment of a patient care ombudsman and granting administrative priority to expenses relating to closing a health care facility in bankruptcy may significantly increase administrative costs, while the provisions requiring compliance with applicable nonbankruptcy law in the sale or transfer of property may affect the ability to realize fully the value of collateral.
In light of these amendments, lenders, when structuring their loans, may consider, among other things, the advisability, if possible, of taking more collateral, which should prime new administrative claims, adjusting their borrowing bases and enhancing their monitoring of collateral. Further, in working out problem health care loans, lenders will need to consider the new costs and arguable impediments to collateral value created by BAPCPA in formulating negotiating strategies and gauging their appetite for allowing bankruptcies or pushing instead for out-of-court resolutions—even if it requires leaving some value on the table for other constituencies.
1 Harold L. Kaplan is chairman of Gardner Carton & Douglas LLP, where he is also co-chair of the Corporate Restructuring and Financial Institutions Practice Group. He can be reached at 191 North Wacker Drive, Suite 3700, Chicago, IL 60606-1698, (312) 569-1204, (312) 569-3204 (fax), [email protected] Return to article
2 Section 1101 of BAPCPA defines a "health care business" as any public or private entity (either for-profit or not-for-profit) that is primarily engaged in offering to the general public facilities and services for (1) the diagnosis or treatment of injury, deformity or disease and (2) surgical, drug treatment, psychiatric or obstetric care. A health care entity may include any (a) general or specialized hospital, (b) ancillary ambulatory, emergency or surgical treatment facility, (c) hospice, (d) home health agency, (e) any similar entity and (f) any long-term care facility, including any skilled nursing facility, intermediate care facility, assisted living facility, home for the aged, domiciliary care facility and health care institution that is related to any of the foregoing facilities if that institution is primarily engaged in offering room, board, laundry or personal assistance with activities of daily living and incidentals to activities of daily living. BAPCPA, Pub. L. 109-8, §1101(a), §101 27(A), 119 Stat. 23, 189. Return to article
3 BAPCPA §1104(a), §333(a), 119 Stat. at 191-192. Return to article
4 The Interim Rules are available at http://www.uscourts.gov/rules. Return to article
5 BAPCPA §1104(a), §333(b)(1), 119 Stat. at 191. Return to article
6 BAPCPA §1104(a), §§333(b)(2) and 333(b)(3), 119 Stat. at 192. Return to article
7 42 U.S.C. §3001, et seq. (2005). Return to article
8 Among other things, the state ombudsmen (1) identify, investigate and resolve complaints made by or on behalf of residents and providing services to protect the health, safety, welfare and rights of residents, (2) represent the interests of residents before governmental agencies, (3) seek administrative, legal and other remedies to protect residents, (4) analyze, comment on and monitor the development and implementation of federal, state and local laws, regulations and other governmental policies and actions that pertain to the health, safety, welfare and rights of residents, and (5) recommend changes in the law and facilitate public comment on laws and regulations. See 42 U.S.C. §§3058(g)(a)(3)(A), (C), (D), (E), (G)(i) and (G)(ii). Return to article
9 BAPCPA §1104(b), §330(a)(1), 119 Stat. at 192. Return to article
10 BAPCPA §1103, §503(b)(8), 119 Stat. at 190-191. Return to article
11 BAPCPA §1105, §704(a)(12), 119 Stat. at 192. Return to article
12 BAPCPA §1102, §351, 119 Stat. at 190. Return to article
13 BAPCPA §1106, §362(b)(28), 119 Stat. at 192. Citing the exception to the automatic stay contained in §362(b)(4) for the exercise of police or regulatory powers, HHS has regularly sought to enforce various Medicare regulations or statutes against debtors, including suspension and exclusion from the Medicare program. Some bankruptcy courts, however, relying on §105 of the Code, have granted injunctive relief to debtors enjoining HHS from enforcing Medicare regulations or statutes in an effort to improve a debtors' ability to reorganize. See, e.g., Richmond Paramedical Servs., Inc. v. United States (In re Richmond Paramedical Servs. Inc.), 94 B.R. 881 (Bankr. E.D. Va. 1988), aff'd., 1989 WL 149144 (E.D. Va. May 17, 1989). Given the fact that bankruptcy courts have generally declined to exercise their equitable powers under §105 where other, particularized provisions of the Code impede the requested exercise of such powers (see, e.g., In re Ludlow Hospital Society Inc., 124 F.3d 22, 28 (1st Cir. 1997)), new §362(b)(28) may make the issuance of injunctions against HHS exclusion actions less likely. Return to article
14 The issue of HHS's right to recoup pre-petition overpayments against its post-petition Medicare payment obligations has been hotly contested and discussed for years. The leading case denying recoupment is In re University Medical Center, 973 F.2d 1065 (3d Cir. 1992). For cases allowing recoupment, see, e.g., United States v. Consumer Health Healthcare Services of America, 108 F.3d 390 (D.C. Cir. 1997); TLC Hospitals Inc. v. HHS, 224 F.3d 1008 (9th Cir. 2000); In re Holyoke Nursing Home Inc., 273 B.R. 305 (D. Mass. 2002), aff'd. in unpublished opinion (D. Mass.), aff'd., 372 F.3d 1(1st Cir. 2004); In re Slater Health Center Inc., 294 B.R. 423 (Bankr. D. R.I. 2003), rev'd., 306 B.R. 20 (D. R.I. 2004), aff'd., 398 F.3d 98 (1st Cir. 2005). Return to article
15 Among the provisions of BAPCPA that may improve patient receivable collections and thus give some comfort to lenders and unsecured creditors are: (1) new provisions making mandatory credit counseling a condition both for filing for bankruptcy protection and for receiving a discharge of debts through bankruptcy as a way of encouraging alternatives to bankruptcy, BAPCPA §106(a) and (b), §§727(a) and 109(h), 119 Stat. at 37-38; (2) new means-testing provisions to be used in establishing a debtor's eligibility for chapter 7, BAPCPA §102, §707(b), 119 Stat. at 27-35, and, in determining the amount available to repay unsecured creditors in chapter 13 cases, BAPCPA §102(h), §1325(b), 119 Stat. at 33-34; (3) preventing or reducing serial (repeat) filings by, among other things, increasing the time that must elapse before the same debtor may receive a second chapter 7 discharge and limiting the ability of a chapter 13 debtor to receive a discharge if the same debtor has received a chapter 13 discharge within the previous two years or a chapter 7, 11 or 12 discharge within the previous four years, BAPCPA §312, §§727(a)(8) and 1328, 119 Stat. at 86-87; (4) making it easier for courts to dismiss chapter 7 and chapter 13 cases, especially if debtors fail to produce certain documents, including federal income tax returns, BAPCPA §316, §521(i), 119 Stat. at 92; and (5) making it more difficult for debtors to take advantage of the more generous homestead exemptions that are available in some states by, among other things, establishing longer residency requirements, BAPCPA §307, §522(b), 119 Stat. at 81, and BAPCPA §322, §522(p), 119 Stat. at 96; and capping the value of a homestead exemption if the debtor has been convicted of a felony and the bankruptcy filing appears to be abusive or if the debtor owes debts arising from violations of federal or state securities laws and certain other types of wrongdoing, BAPCPA §322, §522(q), 119 Stat. at 97. Return to article
16 BAPCPA §201, §502(k), 119 Stat. at 42. It is unclear whether the new provision applies to any unsecured debt or only to debts with a specific term (i.e., loans). Return to article
17 BAPCPA §201, §502(k), 119 Stat. at 42. Return to article
18 Among the additional protections granted to secured consumer lenders under BAPCPA §306(b) can be expected to benefit secured creditors by preventing lien-stripping in certain situations in chapter 13 cases whereby a creditor's allowed secured claim is reduced to the value of the collateral (rather than the outstanding amounts due under the loan) and the creditor is entitled to an unsecured deficiency claim for the amount by which the total claim exceeds the value of the collateral. BAPCPA §306(b), §1325(a), 119 Stat. at 80. Under §327 of BAPCPA, in individual chapter 7 and 13 cases, the value of an allowed claim secured by personal property is now to be determined based on the replacement value of such property as of the petition date without deduction for sales or marketing costs. BAPCPA §327, §506(a), 119 Stat. at 99-100. By mandating the use of the "replacement-value" standard, BAPCPA gives an advantage to secured creditors in redemption and cramdown situations. The replacement value of collateral, which the Supreme Court in Associates Commercial Corp. v. Rash, 520 U.S. 953, 959 n. 2 (1997), defined as the price a willing buyer in a debtor's trade, business or situation would pay a willing seller to obtain property of like age and condition, is generally higher than what the creditor could realize in foreclosing on the collateral (the "foreclosure-value" standard). Moreover, with respect to property acquired for personal, family or household purposes, BAPCPA defines "replacement value" as the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined. BAPCPA §327, §506(a), 119 Stat. at 99-100. Return to article
19 BAPCPA §1221(a), (b) and (c), §§363(d), 1129(a) and 541(f), 119 Stat. at 195-196. Return to article
20 BAPCPA §1221(d), 119 Stat. at 196. Return to article
21 BAPCPA §1221(e), 119 Stat. at 196. Return to article
22 For an example of a case approving an asset sale by a nonprofit health care entity in which the bankruptcy court held that applicable nonbankruptcy law was preempted by federal bankruptcy law, see Georgia International Health Alliance Inc., et al. v. Thurbert E. Baker, Attorney General, State of Georgia, (In re Georgia International Health Alliance Inc., et al.), Adv. Pro. No. 00-6196 (Bankr. N.D. Ga. Feb. 14, 2001) ("Order"). See, also, In re WBQ Partnership, 189 B.R. 97 (Bankr. E.D. Va. 1995), in which the bankruptcy court approved the sale of assets by a health care entity over the objection of the state's Department of Medical Assistance Services. For the view that a sale of assets by a nonprofit health care entity requires deference to state regulators in addition to approval by the bankruptcy court, see In re United Healthcare System Inc., No. 97-1159, 1997 U.S. Dist. WL 176574, at 10 (D. N.J. Mar. 26, 1997) ("The court recognizes that by binding the bankruptcy court to certain state laws and state agency decisions, the bankruptcy court may be hindered in achieving the highest price for the bankruptcy estate's assets"). Return to article