By now, it is common knowledge that many aspects of our health-care system, including a large number of traditional acute care hospitals, are themselves in need of a cure. Inevitably, financially struggling hospitals either find a way to rehabilitate (or benefit from the more rapid failure of their competitors) or enter a downward economic spiral that often ends at the door of the United States Bankruptcy Court. For hospitals of the latter type, Chapter 11 of the Bankruptcy Code, notwithstanding its title — “Reorganization” — can provide an attractive framework even when liquidation is close to a certainty. Chapter 11 allows a debtor-in-possession’s management to maintain control during the liquidation process. However, even with the deference afforded a debtor-in-possession in a Chapter 11 case, the recent rash of hospital bankruptcies in New Jersey serve as a reminder that state health-care regulators can reign supreme when it comes to determining the ultimate disposition of a bankrupt hospital’s assets.
In a typical Chapter 11 case, the parties impacting upon the direction of the bankruptcy case most often include: (1) the debtor, charged with protecting and conserving property in its possession for the benefit of its creditors and maximizing value for its estate; (2) the debtor’s secured creditor(s), with liens upon most, if not all, of the debtor’s assets, including the debtor’s cash; (3) the committee of unsecured creditors, appointed by the United States Trustee to represent the interests of the debtor’s unsecured creditors; and (4) the United States Trustee, charged with promoting efficiency and protecting the integrity of the federal bankruptcy system. Though serving their own interests, these parties all share the common goal of maximizing the value of the estate.
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