Valley Health System and Metropolitan Life Insurance Company

OCR transcription for search; preserved printed pages are authoritative

Main Document Pagei1of15

= :07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc

FILED ENTERED

LE!

FB 2 0 2008 UNITED STATES BANKRUPTCY COURT

CENTRAL DISTRICT OF CALIFORN

UE URTCY COURT _
che CALIFORNIA, ~ Deputy Clark

| CEN’

4

o fo NSN DN MN

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

RIVERSIDE DIVISION v
In re: Case No. 6:07-bk-18293-PC

VALLEY HEALTH SYSTEM, a
California Local Health Care District,

Chapter 9

Date: February 7, 2008

Time: 9:30 a.m.

Place: United States Bankruptcy Court
Courtroom # 303
3420 Twelfth Street
Riverside, CA 92501

Debtor.

de a tal

MEMORANDUM DECISION

U.S. Bank National Association, as Indenture Trustee for the holders of the Valley Health
System Certificates of Participation (1993 Refunding Project) and the Valley Health System
District Revenue Bonds (Refunding and Improvements Project) 1996 Series A (“U.S. Bank”),
and SEIU-United Healthcare Workers — West and Local 121 RN (collectively, the “Unions”)
object to the petition filed by Valley Health System (the “District”) under chapter 9 of the
Bankruptcy Code.' The following appearances were entered at the hearing: Gary E. Klausner
and H. Alexander Fisch for the District; William P. Smith and Nathan F. Coco for U.S. Bank;
Christian L. Raisner for the Unions; Leonard M. Shulman and Mark Bradshaw for Hemet
Community Medical Group, Inc. (“HCMG”); Allan Ickowitz for Kaiser Foundation Health; and
Michael S. Winsten for Devida Renal Treatment Center. The court, having considered the

objections and the District’s response thereto, HCMG’s comments, the evidentiary record, and

29 66

¥ Unless otherwise indicated, all “Code,” “chapter” and “section” references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1330 after its amendment by the Bankruptcy Abuse and
Consumer Prevention Act of 2005, Pub. L. 109-8, 119 Stat. 23 (2005). “Rule” references are to
the Federal Rules of Bankruptcy Procedure (“Fed. R. Bankr. P.”), which make applicable certain
Federal Rules of Civil Procedure (“Fed. R. Civ. P.”).

Casq

oOo oOo NH DB nO FF WY HN

NO wo NY NY NY NO HN NO —|— — RP Re RF SF SF ES PE lS
NY HAO nA F&F W NYO KY DB Oo Oe A DB A FP WD HY KF O&O

b 6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc

Main Document Page 2 of 15

arguments of counsel, makes the following findings of fact and conclusions of law’ pursuant to
Fed. R. Civ. P. 52, as incorporated into Fed. R. Bankr. P. 7052 and made applicable to contested
matters by Fed. R. Bankr. P. 9014(c).
I. STATEMENT OF FACTS

The District is a public agency formed in 1946 under the State of California Local
Healthcare District Law.’ The District encompasses 882 square miles in the San Jacinto Valley
in Riverside County, California, and serves a population within the District of nearly 360,000.
At its inception, the District operated only an 18-bed hospital purchased from the city of Hemet,
California. It now owns and operates the Hemet Valley HealthCare Center (the “Nursing
Facility”), a 113-bed skilled nursing facility in Hemet, California, together with three acute
hospitals - Hemet Valley Medical Center (“Hemet Hospital”), a 340-bed facility in Hemet,
California; Menifee Valley Medical Center (“Menifee Hospital”), an 84-bed facility in Sun City,
California; and Moreno Valley Community Hospital (“Moreno Valley Hospital”), a 95-bed
facility in Moreno Valley, California. The Moreno Valley Hospital and its primary service area
are situated outside the District’s boundaries. Each of the hospitals provides comprehensive

health services and 24-hour emergency medical services.’

¥ To the extent that any finding of fact is construed to be a conclusion of law, it is hereby
adopted as such. To the extent that any conclusion of law is construed to be a finding of fact, it is
hereby adopted as such. The court reserves the right to make additional findings and conclusions
as necessary or as may be requested by any party.

¥ Cal. Health & Safety Code § 32000, et. seq.

“ Services offered at the Hemet Hospital include the Emory J. Cripe Radiation Therapy
Treatment Center for cancer treatment; cardiac care services; inpatient and outpatient surgical
services; behavioral health services; speech, physical, and occupational therapy services; and CT
imaging and magnetic resonance imaging. The Menifee Hospital provides inpatient and
outpatient X-ray services, including mammography, CT scan, and MRI; a critical care unit;
inpatient and outpatient surgery; inpatient and outpatient laboratory services; respiratory services;
physical therapy services; a joint replacement center; and cataract and retina specialty surgeries.
The Moreno Valley Hospital offers inpatient medical, surgical and pediatric services; critical
care, post-critical care, and telemetry units; maternity and women’s services; obstetrics; inpatient

-2-

Cas4d

oO FSF NN HD OA F&F WY NO

NO po NO NO NO NO NO NO ww me lle
“S WN Un BP WO NO F& OF Oo CO JD HDB Wn HBP WO NO =| &

6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc
Main Document Page 3of 15

The cost of the District’s comprehensive health care system was financed, in large part,
by two series of bonds issued by the District (collectively, the “Bonds”): (1) Valley Health
System Certificates of Participation (1993 Refunding Project) and (2) Valley Health System
District Revenue Bonds (Refunding and Improvements Project) 1996 Series A. There was
approximately $84 million in principal and interest outstanding on the Bonds as of the date of the
petition.

On December 13, 2007, the District filed a voluntary petition under chapter 9 in this case
disclosing not more than 5,000 creditors holding claims in excess of $100 million. In
conjunction with its petition, the District filed a Statement of Qualifications Under 11 U.S.C. §
109(c) (“Statement”) certifying under penalty of perjury that it was eligible to be a debtor under
chapter 9. In paragraph 5 of the Statement, the District declared:

The District believes it has been unable, prior to filing its chapter 9 petition, to negotiate

with creditors to reach an agreement with the holders of at lease [sic] a majority in

amount of each class to be impaired under the plan of adjustment (“Plan”) because such
negotiation is impracticable given the numerosity of the envisaged classes to be impaired
under the Plan and the holders of claims in certain of those classes.°

On December 17, 2007, an order was entered directing notice of the commencement of the case,

approving the form of the notice, and setting a deadline of January 17, 2008, for filing objections

to the petition.® On January 16, 2008, U.S Bank timely filed an objection to the District’s

and outpatient surgery; the Spine Center of Excellence program; cardiopulmonary services; and
physical rehabilitation services.

¥ Statement of Qualifications Under 11 U.S.C. § 109(c), p.2, 1.1-5.

¥ Section 923 of the Code states:

There shall be given notice of the commencement of a case under this chapter, notice of
an order for relief under this chapter, and notice of the dismissal of a case under this
chapter. Such notice shall also be published at least once a week for three successive
weeks in at least one newspaper of general circulation published within the district in
which the case is commenced, and in such other newspaper having a general circulation
among bond dealers and bondholders as the court designates.

-3-

Casé¢

Co Oo NS WO WN FP WY NO =

Nm wNpO NO NO NO NY DR RO ee
SI DBD nA F&F WD NO KFKY& DBD Oo OB NHN WDB an Ff WD NYO KF OS

6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc
Main Document Page 4of15

petition asserting that the District is ineligible for relief under chapter 9. U.S. Bank seeks
dismissal of the petition on the grounds that the District has failed to establish that negotiation of
an adjustment of its debt prior to the filing of the petition was impracticable as required by §
109(c)(5)(C). In its limited objection filed on January 17, 2008, the Unions do not question the
District’s eligibility to be a chapter 9 debtor nor its good faith in filing the petition, but simply
ask that “the Court reject any premise that the bankruptcy resulted from the existence of the
[collective bargaining agreement] or the District obligations to [Valley Health System]
workers.”

On February 1, 2008, the District filed a reply to the objections of U.S. Bank and the
Unions arguing that negotiations with its creditors prior to the filing of the petition would have
been not only impracticable, but pointless given the liquidity crisis that threatened the District’s
continued operations and its inability to formulate a viable business plan upon which a
meaningful plan of adjustment could be structured prior to the petition date. On February 4,
2008, HCMG, an unsecured creditor holding claims of approximately $4.5 million, filed a
response stating that it did not support a dismissal of the petition and requested that the court set

a deadline for the filing of a plan pursuant to § 941. On February 7, 2008, the court conducted a

11 U.S.C. § 923. On December 14, 2007, the court signed an Order (1) Directing and Approving
Form of Notice, and (2) Setting Deadline for Filing Objections to District’s Petition approving
the District’s proposed Notice of Commencement of Chapter 9 Case; Deadline for Objections to
Petition; and Related Matters dated December 13, 2007 (“Notice”), and directing service of the
Notice by first class mail on the United States trustee and all entities identified on the District’s
List of Creditors, together with publication of the Notice on at least 3 occasions in the Press
Enterprise and The Bond Buyer, pursuant to § 923. The court also set a deadline of January 17,
2008, for filing objections to the petition pursuant to § 921(c) and (d). On January 23, 2008, the
District filed proof of publication of the Notice in the Press Enterprise and The Bond Buyer in
accordance with the court’s order, together with an affidavit establishing service of the Notice by
United States mail, first class mail, postage prepaid, on 2,775 creditors or other parties in interest
in the case.

1 Limited, Protective Objection of Unions to Chapter 9 Petition of Valley Health System, p.3,
1.12-14.

-4.

Cas4

N

oOo fe SN DO HO Se W

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc
Main Document Page5of15

hearing on the objections at which time the Unions conceded that they were not seeking
dismissal of the District’s petition. At the conclusion of the hearing, the matter was taken under
submission.
II. DISCUSSION

This court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157(a) and
1334(b). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O). Venue is
appropriate in this court. 28 U.S.C. § 1409(a).

Section 921(c) states that “[a]fter any objection to the petition, the court, after notice and
a hearing, may dismiss the petition if the debtor did not file the petition in good faith or if the
petition does not meet the requirements of this title.” 11 U.S.C. § 921(c). If the court does not
dismiss the petition under § 921(c), then it must order relief under chapter 9. 11 U.S.C. § 921(d).
Despite the permissive language of the statute, § 921(c) has been construed as requiring dismissal

of a petition filed by a debtor who is not eligible for relief under chapter 9. In re County of

Orange, 183 B.R. 594, 599 (Bankr. C.D. Cal. 1995) (“Although the language of § 921(c) is
permissive, the case law indicates that § 921(c) ‘must be given a mandatory effect if the defect in
the filing is in the debtor’s eligibility to file Chapter 9.’” (citation omitted)). See generally 6
Collier on Bankruptcy § 921.04[4] at 921-7 (Alan N. Resnick & Henry J. Sommer eds., 15th ed.
2007) [hereinafter Collier].
To qualify for relief under chapter 9, an entity must meet the statutory criteria set forth in
§ 109(c) which states:
An entity may be a debtor under chapter 9 of this title if and only if such entity —
(1) is a municipality;
(2) is specifically authorized, in its capacity as a municipality or by name, to be a
debtor under such chapter by State law, or by a governmental officer or
organization empowered by State law to authorize such entity to be a debtor under
such chapter;
(3) is insolvent;

(4) desires to effect a plan to adjust such debts; and

-5-

Casé

nA Fe WW bd

Oo «eo NN DN

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc
Main Document Page 6of 15

(5)(A) has obtained the agreement of creditors holding at least a majority in
amount of the claims of each class that such entity intends to impair under a plan
in a case under such chapter;

(B) has negotiated in good faith with creditors and has failed to obtain the
agreement of creditors holding at least a majority in amount of the claims of each
class that such entity intends to impair under a plan in a case under such chapter;

(C) is unable to negotiate with creditors because such negotiation is
impracticable; or

(D) reasonably believes that a creditor may attempt to obtain a transfer that is
avoidable under section 547 of this title.

11 U.S.C. § 109(c). The burden of establishing eligibility under § 109(c) is on the debtor. See
County of Orange, 183 B.R. at 599 (“The burden of proving eligibility under § 109(c) is on the
party filing the petition.”); In re Sullivan County Reg’! Refuse Disposal Dist., 165 B.R. 60, 72-73
(Bankr. D.N.H. 1994) (“To qualify for Chapter 9 protection, the debtor must affirmatively
establish it meets each of the requirements of 11 U.S.C. § 109(c)....”).

Neither U.S. Bank nor the Unions question specifically the District’s good faith in filing
the petition.® Nor is there an issue as to whether the District has satisfied the eligibility
requirements of § 109(c)(1), (2), (3) or (4), i-e., that the District (1) is a municipality; (2) was
authorized under California law to file a petition for relief under chapter 9; (3) was insolvent on
the petition date; and (4) desires to effect a plan to adjust its debts. The sole issue before the
court is whether the District has satisfied § 109(c)(5)(C), ie., whether the District was “unable to
negotiate with creditors” prior to the filing of the petition “because such negotiation [was]

impracticable”. See 11 U.S.C. § 109(c)(5)(C).

¥ However, the absence of good faith prepetition negotiations is a factor that may be considered
in determining whether a chapter 9 petition was filed in good faith. See 6 Collier § 921.04[2], at
921-6 (“The facts that may be relevant in a good faith inquiry include (i) the debtor’s subjective
beliefs; (ii) whether the debtor’s financial problems fall within the situations contemplated by
chapter 9; (iii) whether the debtor filed its chapter 9 petition for reasons consistent with the
purposes of chapter 9; (iv) the extent of the debtor’s prepetition negotiations, if practical; (v) the
extent that alternatives to chapter 9 were considered; and (vi) the scope and nature of the debtor’s
financial problems.” (citations omitted)).

-6-

Casé

Co CO SS DB WO FF WD NO =

mw NO NO NO NO NON YN YN HK He Hee Re ee te
NY DWN WA FB WO NO K§& TD OBO FH ND DBO vA F&F W NY KF OC

6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc
Main Document Page /7 of 15

Section 109(c)(5) is intended to promote pre-petition negotiations between a municipality
and its creditors concerning a plan of adjustment. The District admits that it did not engage in
negotiations with its creditors regarding a plan of adjustment prior to the filing of the petition.
U.S. Bank argues that the District was required by § 109(c)(5)(C) to attempt good faith
negotiations with its creditors concerning the terms of a plan of adjustment before concluding

that such negotiation was impracticable, citing Sullivan and In re Cottonwood Water and

Sanitation Dist., 138 B.R. 973 (Bankr. D. Colo. 1992). U.S. Bank reasons that § 109(c)(5) was

designed by Congress to limit a municipality’s access to the bankruptcy court, compel
negotiation, and “protect creditors from capricious bankruptcy filings by municipalities.”

U.S. Bank reads Cottonwood and Sullivan far too broadly. In Cottonwood, the debtor

alleged that it had negotiated in good faith with creditors but had failed to secure the consent of
at least a majority in amount of the claims of each class that it intended to impair under a plan of
adjustment. 138 B.R. at 974. The central issue in Cottonwood was not impracticability under §
109(c)(5)(C), but whether the debtor had satisfied the requirement of § 109(c)(5)(B). Id. (“[The
objectors] argue that the Debtor is not entitled to the benefit of an order for relief because it
failed to comply with the provisions of section 105(c)(5)(B) of the Bankruptcy Code.”).
Cottonwood and its progeny stand for the proposition that a municipality seeking to establish
eligibility under § 109(c)(5)(B) “must be prepared to show that it engaged in good faith
negotiations with its creditors concerning the possible terms of a plan to be effected pursuant to
section 941 of the Bankruptcy Code.” Id. at 979; see Sullivan, 165 B.R. at 79 (concluding that
the debtors “failed to meet their burden of showing that they did negotiate in good faith with
regard to a plan within the meaning and purpose of § 109(c)(5)(B) of the Bankruptcy Code”).
Next, U.S. Bank argues that Congress enacted § 109(c)(5)(C)’s impracticability

requirement “to address the problems that very large municipalities would face in negotiating

2 Objection of U.S. Bank as Indenture Trustee to Chapter 9 Petition of Valley Health System,
p.6, 1.1-2.

-7-

Casé

bo

oOo fF HN NHN OO Ee W

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc
Main Document Page 8 of 15

with numerous bondholders”"° and that § 109(c)(5)(C) was intended by Congress to be applied
narrowly. See Sullivan, 165 B.R. at 79 n.55 (observing that § 105(c)(5)(C) “was enacted in 1976
during the time of an impending municipal bankruptcy filing by the City of New York and was
intended to cover situations in which a very large body of creditors would render prefiling
negotiations impractical”). According to U.S. Bank, a municipality should be permitted to
invoke § 105(c)(5)(C) only when it has reached an impasse after extensive pre-petition
negotiations with its creditors or, alternatively, when pre-petition negotiations are impracticable
due to the substantial number of its creditors. Any other interpretation, says U.S. Bank, would
render §§ 109(c)(5)(A) and (B) meaningless.

First, U.S. Bank attempts to circumscribe the statutory text by pointing to its legislative
history. There is a “strong presumption” that plain and unambiguous statutory language

expresses congressional intent. Ardestani v. INS, 502 U.S. 129, 135 (1991). Where the statute’s

language is plain, “‘the sole function of the courts is to enforce it according to its terms.””

United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989) (quoting Caminetti v. United
States, 242 U.S. 470, 485 (1917)). Any judicial inquiry into the purpose, background or
legislative history of the statute is foreclosed unless a literal application of the statute produces “a
result demonstrably at odds with the intentions of its drafters.” Id. at 242. Moreover, a statute
written in the disjunctive is construed as setting out separate and distinct alternatives. Tillema v.
Long, 253 F.3d 494, 499-500 (9th Cir. 2001); Towers v. United States (In re Pac.-Atl. Trading
Co.), 64 F.3d 1292, 1302 (9th Cir. 1995). Because § 109(c)(5) is written in the disjunctive, a
debtor has four options to satisfy the requirement for negotiation: “[1] it may obtain the
agreement of creditors holding a majority in amount of claims in each class [; (2)] it may show
that it has negotiated with its creditors in good faith but has failed to obtain their agreement [;

(3)] it may show that it is unable to negotiate with creditors because negotiation is impracticable

Y Td. at p.7, 123-24.

Cas@ 6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc

Oo Oo 3 DBD Wn F&F WO NO

NN NO NY NY NN WN NO NO RF ee Be BP BF PSP Oi eS lll el
IY A nA BF WD NYO KY DOD Oo fF AD DH Wn FSF WH NO FF OC

Main Document Page 9Qof15

[; or (4)] it may demonstrate that it reasonably believe[s] that a creditor may attempt to obtain a
preferential transfer.” In re Ellicott Sch. Bldg. Auth., 150 B.R. 261, 265-66 (Bankr. D. Colo.
1992). There is nothing in the language of § 109(c)(5)(C) that requires a debtor to either engage
in good faith pre-petition negotiations with its creditors to an impasse or to satisfy a numerosity
requirement before determining that negotiation is impracticable under the specific facts and
circumstances of a case.

Congressional intent can be divined by giving the words used their ordinary meaning.

United States v. LaBonte, 520 U.S. 751, 757 (1997). “Impracticable” means “not practicable;

incapable of being performed or accomplished by the means employed or at command;
infeasible.” Webster’s New International Dictionary 1136 (3d ed. 2002). In the legal context,
“impracticability” is defined as “a fact or circumstance that excuses a party from performing an
act, esp. a contractual duty, because (though possible) it would cause extreme and unreasonable
difficulty.” Black’s Law Dictionary 772 (8th ed. 2004). Hence, the ordinary meaning of the
word “impracticable” belies any notion that the reach of § 109(c)(5)(C) is limited to the two fact
situations suggested by U.S. Bank.

Second, U.S. Bank’s interpretation of § 109(c)(5)(C) is not supported by the case law
which suggests that creditor numerosity is not the only circumstance under which the
impracticability requirement might be satisfied. “The impracticality requirement may be
satisfied based on the sheer number of creditors involved.” County of Orange, 183 B.R. at 607
(emphasis added); see In re Villages at Castle Rock Metro. Dist. No. 4, 145 B.R. 76, 85 (Bankr.
D. Colo. 1990) (“It certainly was impracticable for [debtor] to have included several hundred
Series D bondholders in these conceptual discussions.”). Negotiations may also be impracticable
when a municipality must act to preserve its assets and a delay in filing to negotiate with

creditors risks a significant loss of those assets. See County of Orange, 183 B.R. at 607-08 (“The

OCIP had no time to enter into negotiations with its participants before acting to protect its

portfolio assets.”); see also 2 Collier § 109.04[3][e][iii], at 109-35 (‘“[W]here it is necessary to

-9-

Casé

oO eo NSN DN Oo FF WO NO

NO NO NO NO KN NO DR Nw mmm me
SN NO A & Ww NO KY CO OC BO NH nA Fb WO NO KF OD

6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc
Main Document Page 10 of 15

file a chapter 9 case to preserve the assets of a municipality, delaying the filing to negotiate with
creditors and risking, in the process, the assets of the municipality makes such negotiations
impracticable.”).

Finally, U.S. Bank’s construction of § 109(c)(5)(C) is not supported by the purpose of

chapter 9. Section 109(c)’s eligibility requirements “are to be construed broadly to provide

access to relief in furtherance of the Code’s underlying policies.” Hamilton Creek Metro. Dist. v.
Bondholders Colo. Bondshares (In re Hamilton Creek Metro. Dist.), 143 F.3d 1381, 1384 (10th
Cir. 1998). Chapter 9 affords a municipality temporary protection from debt collection efforts so
that it may establish a plan of adjustment with its creditors. Id. at 1386; In re Addison Comm.
Hosp. Auth., 175 B.R. 646, 649 (Bankr. E.D. Mich. 1994).

In this case, the evidence supports a finding that the District filed its chapter 9 petition in
the good faith belief that it was the only means to preserve the value of its assets, continue its
business operations, and facilitate continued and uninterrupted healthcare services to its patients
while simultaneously developing a viable, comprehensive business plan that would provide the
basis for a plan of adjustment and meaningful negotiations with all classes, including U.S. Bank
and the Unions. The District did not view the requirements of chapter 9 lightly.

Prior to the filing of the petition, the District communicated with its major creditors,
including U.S. Bank and the Unions, advised them of its intention to seek relief under chapter 9,
and assured them that it would negotiate a plan of adjustment consistent with the requirements of
chapter 9 once it developed a viable business plan. The District’s Board of Directors approved
the chapter 9 filing only after a public meeting, noticed in accordance with state law, at which
attendees were advised of the Board’s intention to file a chapter 9 petition and given the
opportunity to question the Board and its professionals and to be heard on the issue. The
District’s decision “was made only after a careful review of all options and strategies and with

the input and guidance of consultants with expertise in healthcare restructuring, corporate

-10-

Cas4d

ao 41) DH WA FSF WW WD

‘oO

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc
Main Document Page 11 of 15

counsel, bond counsel, and bankruptcy counsel.”"!

The District had exhausted its efforts to solve its financial problems through the
restructuring of debt or the sale of assets. Two years earlier, the District sought to restructure its
debt through Riverside County Measure I (“Measure I”) which contemplated the issuance of
$485 million in general obligations bonds, secured by property tax revenues, to retire the
District’s special revenue bond debt, finance necessary capital improvements, and provide the
District the time and capital required to return to profitability. Measure I was rejected by the
voters on September 16, 2005. The District then attempted to improve its liquidity through the
sale of assets. On August 8, 2007, the District approved a sale of substantially all of its assets to
Select HealthCare Solutions (“Select”), subject to voter approval in accordance with California
law. Select and the District further agreed that, in the event the sale was not approved by the
voters, then Select would have the opportunity to purchase the Moreno Valley Hospital from the
District for $47 million. Voters rejected Riverside County Measure G (“Measure G”), which
sought approval of the asset sale to Select, on November 6, 2007 - 37 days before the District
filed its chapter 9 petition.

On October 15, 2007, the District retained QHR Consulting Services (“QHR”), a
turnaround specialist, to analyze the District’s operations and complex contractual relationships,
stabilize the District’s financial situation, and ultimately formulate a business plan to return the
District to profitability. QHR examined the District’s $250 million annual budget before
undertaking the task of framing a meaningful plan of adjustment. Based on its preliminary
findings, QHR recommended operational changes to increase the District’s revenues by
approximately $12 million without materially increasing expenses and to eliminate

approximately $20 million in annual expenses with no degradation to the quality of the District’s

4 District’s Reply to Objection of U.S. Bank as Indenture Trustee and Limited Objection of
SEIU-United Healthcare Workers — West and Local 121 RN to Chapter 9 Petition of Valley
Health System, p.3, 1.1-3.

-ll-

Cas4d

a

oOo Oo SYN HWN AN

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

6:07-bk-18293-PC Doc 84 Filed 02/20/08 Entered 02/20/08 11:33:59 Desc
Main Document Page 12 of 15

operations. However, QHR determined that the key to returning the District to profitability

hinges upon (1) securing fee for service agreements to replace its capitation contracts; and (2)

consummiating a sale of the Moreno Valley Hospital.

Prior to the filing of the petition, the District derived its revenue from a complicated
system of capitation and sub-capitation agreements. The District was losing money under its
capitation contracts, as well as the associated capitation risk pools formed with certain physician
groups. QHR estimated that the unpaid risk pool liability alone was in excess of $16 million on
the petition date, and no funds had been reserved for payment of these liabilities. QHR
concluded that the District must negotiate fee for service agreements to replace its capitation
arrangements. Since the filing of the petition, the District has renegotiated its contracts with Blue
Cross, Health Net, PacifiCare (United Health Care), Secure Horizons (United Health Care), Inter
Valley, Inland Empire Health Plan, and SCAN resulting in an estimated $1.2 million per month
reduction in operational losses. Because the loss of upfront capitation payments would create a
significant reduction in cash flow, the District filed its chapter 9 petition to preserve the value of
its assets and to facilitate a transition from the complex capitation structure to fee for service
agreements without a degradation in the quality of patient care or an interruption in healthcare
services.

The fate of the Moreno Valley Hospital was unknown on December 13, 2007. The
Moreno Valley Hospital was generating losses of between $300,000 to $500,000 per month on
the date of the petition and Select had not pursued its opportunity to purchase the hospital from
the District. Since the filing, the District has been negotiating with Select and Kaiser Permanente
for the sale of the Moreno Valley Hospital to Kaiser for more than $47 million. QHR estimates
that the sale of the Moreno Valley Hospital will substantially reduce the District’s operating
losses, increase monthly revenues by approximately $250,000, and reduce the District’s
indebtedness to its bondholders by approximately $31.5 million.

Finally, the District has a substantial number of creditors. The District’s petition

-12-

Cas4q

oO CO SN WN Ww BP WH NO

NO NO NO NO NO VN NO NO wm mm mm lt
“SI DA A BP WD NO KK DW OO CO sD DBR A FF WO HO | OC

6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc
Main Document Page 13 of 15

discloses not more than 5,000 creditors holding claims in excess of $100 million. Notice of the
commencement of the case was sent to 2,775 creditors and other parties in interest. QHR
believes “at least eleven classes of claims would be required under any plan of adjustment.”””
Negotiation with creditors was not practicable during the 37 days following voter rejection of
Measure G given the District’s liquidity crisis, the number of its creditors, the risk of loss to its
assets, and its resulting inability to construct a realistic plan of adjustment.

Meaningful negotiation is infeasible, if not impossible, absent a plan of adjustment
predicated upon a comprehensive business plan to return a municipality to profitability. “Even if
QHR had unlimited time in which to concentrate on a business plan, any plan of adjustment
based thereon prior to resolving the Select issues, understanding and improving the District’s
operational inefficiencies, and renegotiating the District’s payor relationships, would have [been]
extremely speculative and of limited usefulness.”"

Il. CONCLUSION

Based upon the foregoing, the court concludes that the District was unable to negotiate
with creditors prior to the filing of its chapter 9 petition in this case because negotiation was
impracticable within the meaning of § 109(c)(5)(C). Accordingly, the objections of U.S. Bank
and the Unions to the District’s chapter 9 petition will be overruled and U.S. Bank’s request for
dismissal of the petition will be denied.

Separate orders will be entered coné

Dated: February 20, 2008

PETER H. CARROLL
United States Bankruptcy Judge

4 Declaration of Hubert U. King in support of District’s Reply to Objection of U.S. Bank as
Indenture Trustee and Limited Objection of SEIU-United Healthcare Workers — West and Local
121 RN to Chapter 9 Petition of Valley Health System, p.26, 1.27 to p.27, 1.1.

® Id. at p.27, 1.23 to p.28, 1.1.

-13-

Case 6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc
Main Document Page 14 of 15

NOTE TO USERS OF THIS FORM:
Physically attach this form as the last page of the proposed Order or Judgment.
Do not file this form as a separate document.

In re VALLEY HEALTH SYSTEM, CHAPTER 9

Debtor. | CASE NUMBER RS 07-18293 PC

NOTICE OF ENTRY OF JUDGMENT OR ORDER
AND CERTIFICATE OF MAILING

TO ALL PARTIES IN INTEREST ON THE ATTACHED SERVICE LIST:

1. You are hereby notified, pursuant to Local Bankruptcy Rule 9021-1(a)(1)(E), that a judgment or order entitled
(specify): MEMORANDUM DECISION

was entered on (specify date):

FEB 20 2008

2. | hereby certify that | mailed a copy of this notice and a true copy of the order or judgment to the persons and
entities on the attached service list on (specify date):
FEB 20 2008
Dated: FER 9 9 JON D. CERETTO
« O 2008 Clerk of the Bankruptcy Court

ye Oe

Deputy Clerk

By:

Rev. 1/01 This form is optional. It has been approved for use by the United States Bankruptcy Court for the Central District of California. F 902 1 -1 . 1

Case 6:07-bk-18293-PC Doc 84 _ Filed 02/20/08 Entered 02/20/08 11:33:59 Desc
Main Document Page 15 of 15

Service List

Valley Health System
1117 East Devonshire Avenue
Hemet, CA 92543

Timothy J. Farris, Esq.
United States Trustee
3685 Main Street, Ste. 300
Riverside, CA 92501

Q. Scott Kaye, Esq.

McDermott, Will & Emery LLP
2049 Century Park East, 38" Floor
Los Angeles, CA 90012-3218

William P. Smith, Esq.

Nathan F. Coco, Esq.
McDermott, Will & Emery LLP
227 West Monroe Street
Chicago, IL 60606-5096

Leonard M. Shulman, Esq.

Mark Bradshaw, Esq.

Shulman Hodges & Bastian LLP
26632 Towne Centre Drive, Suite 300
Foothill Ranch, CA 92610

Christian L. Raisner, Esq.

Weinberg, Roger & Rosenfeld

1001 Marina Village Parkway, Suite 200
Alameda, CA 94501-1091

H. Alexander Fisch, Esq.

Stutman, Treister & Glatt

1901 Avenue of the Stars, 12 Floor
Los Angeles, CA 90067

Michael S. Winsten, Esq.
Winstein Law Group

28202 Cabot Road, Suite 630
Laguna Niguel, CA 92677

Paul R. Glassman, Esq.

Adam M. Starr, Esq.

Greenberg Traurig, LLP

2450 Colorado Avenue, Suite 400E
Santa Monica, CA 90404

Shari L. Heyen, Esq.

Jana K. Terry, Esq.
Greenberg Traurig, LLP
1000 Louisiana, Suite 1800
Houston, TX 77002

Allan H. Ickowitz, Esq.

Nossaman, Guthner, Knox & Elliott, LLP
445 S. Figueroa Street, 31* Floor

Los Angeles, CA 90071-1602

Joseph M. Galosic, Esq.

Law Offices of Joseph M. Galosic
26632 Towne Centre Drive, Suite 300
Foothill Ranch, CA 92610-2808