Sale of a Nonoperating Hospital Doesn’t Require State Approval

June 14, 2017

The California Attorney General was not entitled to approve the sale of a nonoperating hospital because it was no longer a “health facility” under state law, according to Bankruptcy Judge Ernest M. Robles of Los Angeles.

In addition to state law, the case involved Section 363(d)(1), which permits the sale of assets of a nonprofit institution “only in accordance with nonbankruptcy law,” and Section 541(f), which allows the sale of the assets of a charitable organization under Section 501(c)(3) of the Internal Revenue Code “only under the same conditions as would apply if the debtor had not filed a case under this title.”

State law requires the Attorney General’s approval whenever a nonprofit corporation that “operates or controls a health facility” sells a “material amount” of its assets. “Health facility” is defined as a facility “operated” to provide diagnosis, care or treatment of human illness.

The nonprofit owner of a 137-bed acute-care hospital filed a chapter 11 petition and arranged for the sale of the facility as a going concern to a buyer for some $21 million. The Attorney General refused to approve the sale unless the for-profit buyer agreed, among other things, to provide $2.24 million annually in charity care. Unwilling to provide so much free care, the buyer terminated the purchase agreement.

With financing almost exhausted, the hospital shut down completely and discharged all patients. The debtor then sought approval from Judge Robles to sell most of the assets apart from accounts receivable for a price that was effectively $8 million lower than the aborted going-concern sale.

The Attorney General again objected, asserting the right to approve the sale and insisting that the buyer agree to provide a specified amount of indigent care, among other things.

Judge Robles overruled the objection, approved the sale, and denied a stay pending appeal in an opinion on May 15. Judge Robles said there were no California precedents regarding the Attorney General’s right to approve the sale of a “closed hospital.” He then applied the rules of construction to conclude that nonoperating assets “do not qualify as a ‘health facility’ under California law,” meaning that the “debtor is not required to obtain the Attorney General’s consent.”

In the process, Judge Robles rejected the argument that allowing the sale would encourage hospital operators to avoid state approval by shutting down temporarily.

On the Attorney General’s request for a stay pending appeal, Judge Robles agreed that the case involved “an important issue of state law that will likely recur.” Although mootness “does amount to irreparable harm,” he denied a stay because “the other three factors weigh strongly against a stay.”

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