567 B.R. 820
Bankr. C.D. Cal.2017Background
- Debtor: Gardens Regional Hospital (nonprofit) operated a 137‑bed acute care hospital in Hawaiian Gardens, CA; filed Chapter 11 on June 6, 2016.
- Debtor initially agreed to sell the operating hospital to a for‑profit buyer; California AG approved that sale but imposed substantial charitable‑care and community‑benefit conditions, prompting buyer to withdraw.
- Financial distress forced the Debtor to close the hospital (patients transferred and license placed in suspense); Debtor then sought to sell noncash assets of the closed hospital (lease, suspended license, pharmacy/lab permits, FF&E, records), excluding cash, receivables, and certain contracts.
- Debtor argued AG consent under Cal. Corp. Code § 5914(a) (which applies to nonprofits that “operate or control a health facility” as defined in Cal. Health & Safety Code § 1250) is not required because a closed hospital is not a "health facility."
- AG argued the assets remain subject to § 5914(a) (to prevent circumvention by temporary closure) and that he may impose post‑sale conditions (e.g., charitable care obligation); AG sought a stay pending appeal of the sale approval.
- Court approved sale to American Specialty free and clear of the AG’s asserted review/conditioning authority, found purchaser a good‑faith buyer under § 363(m), and denied AG’s stay application.
Issues
| Issue | Plaintiff's Argument (Debtor) | Defendant's Argument (Attorney General) | Held |
|---|---|---|---|
| Whether AG consent under Cal. Corp. Code § 5914(a) is required to sell assets of the closed hospital | Closed hospital assets are not a “health facility” under Cal. Health & Safety Code § 1250 because the statute uses present tense and requires operation/receiving patients | Assets remain a charitable health facility under § 1250 despite closure; otherwise nonprofits could evade review by temporarily closing | Held: § 5914(a) does not apply to closed hospital assets; AG consent not required |
| Whether AG’s claimed authority to impose post‑sale monetary/charitable conditions is an “interest in property” under 11 U.S.C. § 363(f) | Debtor: AG conditions are not a property interest that can block sale | AG: regulatory power to impose conditions attaches to assets and should survive sale | Held: AG’s asserted right to impose conditions is an “interest in property” and can be cut off under § 363(f) so sale may be free and clear |
| Whether 28 U.S.C. § 959(b) or other state‑law compliance requires AG review in liquidation | Debtor: § 959(b) governs operating debtors, not a debtor liquidating/closing a business; sale complies with state law | AG: sale violates state law oversight requirements for transfers of charitable health assets | Held: § 959(b) inapplicable to liquidation here; sale does not violate applicable state law because § 5914(a) does not apply |
| Whether to grant a stay pending appeal of the sale order | Debtor: stay would likely cause sale collapse and irreparable harm to estate; AG unlikely to prevail | AG: appeal raises recurring state‑law issue and closing sale will moot appellate review (irreparable injury) | Held: stay denied — AG showed some irreparable harm (mootness risk) but failed likelihood‑of‑success and balance of harms favors denying stay |
Key Cases Cited
- Folger Adam Sec., Inc. v. DeMatteis/MacGregor JV, 209 F.3d 252 (3d Cir.) (broad definition of “interest in ... property” for § 363(f))
- In re PBBPC, Inc., 484 B.R. 860 (1st Cir. BAP) (statutory monetary obligations tied to property can be an interest in property under § 363(f))
- United Mine Workers of Am. Combined Benefit Fund v. Leckie Smokeless Coal Co., 99 F.3d 573 (4th Cir.) (statutory obligations constitute interests in property for § 363(f))
- In re Walter, 83 B.R. 14 (9th Cir. BAP) (business justification standard for § 363(b) sales)
- Nken v. Holder, 556 U.S. 418 (U.S. 2009) (stay‑pending‑appeal factors framework)
- Leiva‑Perez v. Holder, 640 F.3d 962 (9th Cir.) (quantum of likelihood of success required for stay pending appeal)
- Hilton v. Braunskill, 481 U.S. 770 (U.S.) (stay standards and balancing test)
- In re Ewell, 958 F.2d 276 (9th Cir.) (good‑faith purchaser doctrine under § 363(m) and collusion considerations)