The first day hearing has not yet been scheduled.
In its statement of qualifications to commence the chapter 9 case, the district says it is eligible to be a debtor under chapter 9 because, as a “political subdivision or public agency or instrumentality” of the state of California, it is a municipality; it is authorized to file the bankruptcy case by California Government Code Section 53760; it is insolvent; it desires to effect a plan to adjust its debts; and it negotiated in good faith with creditors holding at least a majority in amount of the claims in each class that it might impair under a plan of adjustment and failed to obtain their agreement, further negotiations would be impracticable, and it reasonably believes that certain trade creditors have obtained or may attempt to obtain transfers that are voidable under section 547 of the Bankruptcy Code. The district further states that it filed its petition in good faith.
| Representatives |
| Role |
Name |
Firm |
Location |
|---|
| Debtors' Chapter 9 Counsel |
Michael A. Sweet |
Fox Rothschild LLP |
San Francisco |
| Keith C. Owens |
| Nicholas A. Koffroth |
| Debtors' General Counsel |
Heidi A. Quinn |
Noland, Hamerly, Etienne & Hoss |
Salinas, Calif. |
| Debtors' Financial Advisor |
Carol Fox |
B. Riley |
Fort Lauderdale, Fla. |
| U.S. Trustee |
Jared A. Day |
Office of the U.S. Trustee |
Reno, Nev. |
| Jason Blumberg |
Sacramento, Calif. |
| Debtors' Claims Agent |
Paul Deutch |
Omni Agent Solutions |
New York |
Future principal maturities for the district’s aggregate secured debt borrowings through 2027 are approximately $2.6 million in 2023, $2.8 million in 2024, $2.9 million in 2025, $4.1 million in 2026 and $3.3 million in 2027.
The debtor attributes its bankruptcy filing to, among other things, limited access to working capital and systemic issues, including payor mix and labor expenses, and “intends to utilize the Bankruptcy Case to adjust its liabilities that it was unable to adjust outside of bankruptcy to stabilize the District’s finances in the long-term, and either pursue a transaction or restructure operations to permit the District to continue independently.”
The debtor is represented by Fox Rothschild LLP as bankruptcy counsel and B. Riley as financial advisor. Omni Agent Solutions is the claims agent. The case has been assigned to Judge Stephen Johnson (case No. 23-50544).
Background
The debtor is a California healthcare district organized pursuant to the California Health and Safety Code that operates the following facilities in San Benito County, Calif., under a consolidated general acute care hospital license: (i) a 25-bed acute care hospital; (ii) two skilled nursing facilities; (iii) five rural health clinics; (iv) two specialty centers; and (v) two laboratories, according to the Casillas declaration.
According to the first day declaration of the debtor’s interim CEO, Mary Casillas, the district has “struggled with limited access to
working capital for years,” holding between 65 and 23 days’ cash on hand, or DCOH, over the last five years, compared with an average of approximately 222 for California critical access hospitals in general. Casillas attributes these issues primarily to “systemic issues owing to the District’s payor mix, size, location, and longstanding imbalances in its
labor expenses, which constitutes approximately 70% of the District’s annual expenses.”
According to Casillas, the debtor projects that the district “can continue operations through the end of 2023 without modifications to services, but that service reductions will be required by early 2024 absent a [strategic] transaction.” In addition, “the District is projected to operate at a negative net cash flow of $6.1 million in 2024 and exhaust its cash on hand by approximately September 2024 without further modifications to the District’s operations.”
Casillas' declaration describes the circumstances that pushed the district into bankruptcy as it incurred approximately $5 million in unanticipated expenses in mid-2022 related to a Medicare overpayment claim and faced a subsequent reduction in Medicare payments and delays in private payor payments. The district's cash crisis, which prompted its board to declare a
fiscal emergency in November 2022, was amplified by Covid-related operating losses and inflationary pressures, according to the declaration.
The district instituted a series of short-term operational and financial initiatives that “
materially improved” its cash position, bolstering its cash on hand to $5.1 million as of Feb. 25 from a projected deficit of $6 million. However, the initiatives were only intended to stabilize the district’s financial condition “to provide sufficient time for the District to implement a long-term stabilization plan.”
Casillas’ declaration also provides an overview of the district’s prepetition search for a
strategic partner and negotiations with stakeholders. Although the district, which recently concluded mediation efforts aimed at restructuring its obligations, had success in negotiations to reduce its Medicare recoupment schedule and obtain a bridge loan from the California Health Facilities Finance Authority, it was unable to achieve a consensual agreement with unions regarding employee-related liabilities.
Casillas describes the district’s three-phase
pendency plan, recently adopted by the board, which is intended to permit sufficient time for the district to effectuate its optimal long-term reorganization strategy through a strategic transaction or, alternatively, reduce services to operate independently if a transaction does not materialize.
During Phase 1 of the plan, the district intends to implement organizational restructuring initiatives that the district could not implement outside of a bankruptcy case, including a modification of employee benefits that is intended to improve cash flow by more than $2 million during 2023. “The Pendency Plan presumes that the proposed Phase 1 changes are implemented by July 1, 2023 to realize the proposed cash flow enhancements,” the declaration states.
Phase 2 provides for an “orderly transaction process,” and the optional Phase 3 would provide for a service reduction in the event a successful transaction is not instituted.
“The District’s efforts to establish a pathway to long-term viability has [
sic] met with successes and helpful collaboration; however, as of the date of this Declaration, the District has not yet identified a transaction partner and has not reached deals with certain of its principal stakeholders to adjust its debts. The Debtor’s current cash forecast reflects that the District can continue operations through the end of 2023 without modifications to services, but that service reductions will be required by early 2024 absent a transaction,” Casillas states.
Other Motions
As of the time of publication, the debtor has filed the following first day motions: