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A San Jose bankruptcy judge on June 7 denied the most recent attempt by the San Benito Health Care District to receive bankruptcy protection.
Judge Stephen L. Johnson, who rejected the hospital’s petition for Chapter 9 bankruptcy in March, last week denied the motion for a stay pending appeal filed by the hospital district on April 25.
The hospital appealed Johnson’s decision to dismiss its bankruptcy petition on April 4.
The stay would have temporarily suspended the judge’s ruling to deny the health care district’s bankruptcy petition, “thereby preventing judicial alteration of the status quo,” Johnson wrote.
The stay was challenged by the California Nurses Association and National Union of Healthcare Workers, which argued that if Hazel Hawkins were granted bankruptcy protection the district would be able to modify their Collective Bargaining Agreements.
According to the health care district, the stay would have given it time to pay its debts and strike a deal with a transaction partner while waiting for Johnson’s ruling on the appeal, which could take months.
Health care district Public Information Officer Marcus Young said Johnson’s denial of the stay should not affect the district’s tentative plan to enter into a lease-to-own deal with Insight Health Systems.
“We don’t anticipate that this ruling will have any impact on Insight’s interest, or our moving forward with working out agreeable terms that will later be put to voters for final approval,” Young said.
Johnson’s latest ruling comes on the heels of the health care district board’s decision to direct staff to continue negotiations with Insight, a Michigan-based 501(c)(3) nonprofit based upon universal Islamic teachings, according to its website, after months of courting.
An Insight official said the organization is still interested in taking over the hospital.
“Insight’s proposal to the San Benito Health Care District is not contingent on legal matters related to bankruptcy,” Baseer Tajuddin, Insight general counsel, told BenitoLink. “Insight’s offer stands as presented.”
According to the court document, the health care district claimed that Johnson’s denial of its bankruptcy petition caused irreparable injury. “First, the District faces the loss of potential transaction partners due to the case’s dismissal. Second, the postpetition loan it hoped to obtain from California’s Distressed Hospital Loan Program (DHLP) was rescinded. Finally, CNA has demanded damages resulting from the District’s unilateral modifications to the CBA during the bankruptcy case.”
The district had four possible suitors at the time of its bankruptcy hearing in December:
American Advanced Management (AAM), Insight, San Benito Health Alliance-Ovation Collaborative and the San Benito County joint power authority. San Benito Health Alliance-Ovation dropped out in April and AAM dropped out in May.
Johnson found the first claim to be false after reviewing transcripts from an April 25 health care district board meeting where a consultant with B. Riley, hired by the health care district to review its finances, said the two suitors dropped out due to other reasons.
As in his first ruling, Johnson found the district’s testimony contradictory and called it “speculation” and “unwarranted.”
$10 million loan rescinded
The health care district claimed the state’s $10 million distressed hospital loan was rescinded after Johnson rejected its bankruptcy petition. Johnson found that this claim did not show genuine harm, but potential harm.
Young pointed out that while the loan was in fact rescinded after the initial ruling, the district reapplied and later received approval. He said the money is “not in the bank yet.”
Cecila Montalvo, a consultant for San Benito County, which proposed forming a joint powers authority with the district, said she wasn’t surprised by Johnson’s denial of a stay pending appeal.
“The judge, again, was pretty critical and pointed to contradictions in their testimony,” Montalvo said.
She added that the judge’s tone was similar to the initial decision.
“I do not think the judge was harsh,” she said. “The judge has been consistent. He really does not feel that the hospital has proven its eligibility [for bankruptcy protection] and not only do I think it’s fair but I think it’s so well grounded.”
As for the county’s proposal to create a joint powers authority run by an appointed board to manage the hospital, Montalvo said it’s still on the table.
“I think the county has done its work and is ready to partner with the hospital if this doesn’t work out,” she said.
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