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In re Christ Hosp.

United States Bankruptcy Court, D. New Jersey

December 3, 2013

In re: CHRIST HOSPITAL, a New Jersey not-for-profit corporation, Debtor

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[Copyrighted Material Omitted]

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McELROY, DEUTSCH, MULVANEY & CARPENTER, LLP, Louis A. Modugno, Esq., Morristown, NJ, Counsel to Hudson Hospital Propco, LLC, Hudson Hospital Opco, LLC, Hudson Hospital Holdco, LLC and Vivek Garipalli.

McCUSKER, ANSELMI, ROSEN & CARVELLI, P.C., Bruce S. Rosen, Esq., Florham Park, NJ; -and- LAW OFFICES OF WILLIAM S. KATCHEN, LLC, Florham Park, NJ, Counsel to Prime Healthcare Services, Inc.

OPINION

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HONORABLE MORRIS STERN, UNITED STATES BANKRUPTCY JUDGE.

I. FACTUAL BACKGROUND.

Movant here (collectively " Hudson" ) [1] was the successful bidder in bankruptcy for essentially all of the assets of Chapter 11 debtor Christ Hospital, a New Jersey not-for-profit corporation (the " hospital" or the " debtor" ). The sale, pursuant to a court-ordered auction process, was approved by order of this court on March 27, 2012 (the " Sale Approval Order" ). That Order provided Hudson with what it contends are the benefits of broad " free and clear" protections as a purchaser of hospital assets per 11 U.S.C. § 363(f). [2] Hudson now seeks to enjoin Prime Healthcare Services, Inc. (" Prime" ) from pursuing its pending lawsuit against Hudson in the New Jersey Superior Court (the " State litigation" ). There Prime asserts remaining active claims of " Tortious Interference in Contractual Relations," " Tortious Interference with Prospective Economic Gain" and " Unfair Competition" relating to Hudson's acquisition of hospital assets but with origins before the hospital filed its February 6, 2012 voluntary Chapter 11 bankruptcy petition. [3] Hudson asserts, inter alia, that the Sale Approval Order and this court's order confirming the hospital's plan of liquidation (the " Confirmation Order" )

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are being collaterally attacked and violated by Prime's pursuit in the State litigation. Hudson relies heavily on res judicata and collateral estoppel concepts. Prime, as Hudson sees it, should thus be enjoined from continuing that litigation. In fact, sale-related injunctions inuring to the benefit of the successful § 363 sale bidder were included in the Sale Approval Order and the Confirmation Order.

Prime filed opposition to Hudson's motion for an injunction and a cross-motion to have the reference withdrawn by the district court pursuant to 28 U.S.C. § 157(d), thus allowing that court to hear the current disputes. Prime argues that none of the following gives the bankruptcy court subject matter jurisdiction over Prime's state law claims: any order entered in the bankruptcy case; 28 U.S.C. § 1334(b); United States Supreme Court cases which otherwise restrict bankruptcy court jurisdiction or the ability of this court to enter final judgments; [4] or, 11 U.S.C. § 105(a) (bankruptcy court power to issue orders " necessary or appropriate" to carry out provisions of Title 11 or enforce its orders). Prime also argues that no bankruptcy court order precludes Prime's State litigation claims under collateral estoppel or res judicata . Contesting Hudson's position and the precedent it relies on, Prime asserts:

Here, the Bankruptcy Court did not hear evidence, consider, or make findings on Prime Healthcare's claims against [Hudson] for Prime's state court claims. These issues were not adjudicated or litigated in the Bankruptcy Court, and were not required to be determined by the Bankruptcy Court. Simply, [Prime's] state law claims involving multiple hospitals in multiple states are separate and apart from the Christ Hospital Bankruptcy Proceeding. . . .
[Hudson] relies on the case In re Farmland Industries, Inc., 376 B.R. 718, 725-26 (Bnkr.W.D. Mo. 2007) [sic], aff'd, 639 F.3d 402 (8th Cir. 2011) for the proposition that an unsuccessful bidder asserting post-sale tortious interference claims is not permitted to collaterally attack a bankruptcy sale order because it would require " overruling numerous findings from the Sale Orders." Id. at 727. However, this case is factually inapposite to the instant matter. [5]
. . . .
Here, [Prime's] claims in no way relate to [Hudson's] conduct during the Christ Hospital bankruptcy sale process, nor does [Prime's] Superior Court Complaint allege misconduct in connection with the Bankruptcy Proceedings.

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Rather, [Prime's] state law claims relate solely to [Hudson's] pre-petition, pre-bidding conduct involving Christ Hospital. These claims are wholly unrelated to the Bankruptcy Proceeding and the Bankruptcy Court's determination that [Hudson] was a " good faith" purchaser.

(Dkt. 1302, Prime's Memorandum of Law in support of its cross-motion and in opposition to Hudson's motion for an injunction.) As will be seen, this court acknowledges a certain degree of relevance of Farmland, but finds no need to rely heavily on that opinion for factual or conceptual support.

At outset and most fundamentally, this court disagrees with Prime's characterization of its economic tort claims - they are quite obviously intertwined with this Chapter 11 case. Indeed, Prime's convenient current statement that its tort claims do not encompass any Hudson misconduct " in connection with" the bankruptcy or its sale proceeding flies in the face of its own State litigation pleadings; a " forced" bankruptcy is alleged and, having supposedly driven Prime from the marketplace by unfair competitive practices, Hudson is said to have acquired the Christ Hospital assets for a diminished price. Moreover, the " missing" bankruptcy hearing on Prime's remaining economic tort claims was solely a function of Prime's silence. Those claims, which are independent of later market competition between Prime and Hudson for other hospitals, had manifested as of the time of the § 363 sale. However, only Prime was in a position to be aware of its status as a potential tort claimant . [6] While Prime was not required to voice its objection to the sale in bankruptcy, it was put to the burden as a knowing claimant to object or risk loss of its claim to a necessarily accelerated bankruptcy process (with broad orders of process protection).

The cross-motion to withdraw the reference was transmitted to district court pursuant to D.N.J. LBR 5011-1; hearing on this withdrawal motion was eventually adjourned at Prime's request, pending resolution by the bankruptcy court of Hudson's motion. Prime had filed with the bankruptcy court (pursuant to Fed. R. Bankr. P. 5011(c)) a motion to stay the hearing on Hudson's motion for an injunction until the district court's resolution of Prime's motion to withdraw the reference. This court denied Prime's motion for a stay for the reasons set forth on the record, and heard extensive oral argument on Hudson's motion.

The Parties. Prime's complaint describes Prime as a major operator of for-profit acute care hospitals (sixteen in California, Nevada, Pennsylvania and Texas). It also operates not-for-profit hospitals in

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California and Texas through a charitable foundation. Its hospital employees total more than 16,000. Hudson owns and operates three for-profit hospitals (including the successor to Christ Hospital) in Hudson County, New Jersey.

Prepetition Events/Reasons for Chapter 11 Filing. In its Disclosure Statement dated April 23, 2013 the debtor describes as follows certain events leading up to this case (some of which parallels factual statements in Prime's State litigation complaint) ( Disclosure Statement, dkt. 1172, pp. 8-11, including quoted and synopsized passages).

Debtor's earliest contact with Prime was June, 2011. " Debtor entered into a Letter of Intent on August 12, 2011 (the " LOI" ) with Prime . . . followed by a December 2, 2011 asset purchase agreement (the " Prime APA" )."
" As of the date the Debtor executed the LOI with Prime, and given the Debtor's application to terminate the pension plan, the Debtor owed approximately $90,000,000 to the Pension Benefit Guaranty Corporation (" PBGC" ) and the Internal Revenue Service (" IRS" ), $12,700,000 to Bon Secours Health System (" Bon Secours" ), and $20,000,000 to other unsecured creditors, for total balance sheet liabilities on these three items alone of $122,700,000. . . ."
" With Prime's support, the Debtor was able to borrow an additional $5,600,000 on its line of credit with HFG (defined below) because of Prime's agreement to participate in that transaction. As part of this, the Debtor resolved the Bon Secours claim of $12,700,000 for $1,100,000, which was funded by Prime through the HFG line and paid on September 1, 2011 . . . ."
. . . .
" On September 14, 2011. . . the Debtor filed its notice under the Community Healthcare Asset Protection Act (" CHAPA" ) with the Attorney General. On September 30, 2011, Prime filed its Certificate of Need (" CON" ) Application with the DOH [New Jersey Department of Health]."
" In connection with Charity Care advances made by the DOH in the 4th quarter of 2011, the DOH had required that the Debtor present the executed Prime APA prior to the December, 2011 advance, which the Debtor did on December 2, 2011. Thereafter, the State released the requested Charity Care advance."
. . . .
" The Debtor invited the unsecured creditors to form an unofficial committee, which they did . . . The Unofficial Committee retained its own restructuring attorneys and financial advisors, and in the spirit of cooperation, the Debtor funded those advisors an initial retainer of $150,000."
. . . .
" On December 23, 2011, and despite the fact that it was under an exclusive agreement with Prime, the Debtor received an unsolicited offer to purchase its assets from Hudson Hospital Holdco, LLC (" Hudson" ), an affiliate of the entity that had purchased both Bayonne Medical Center and Hoboken University Medical Center out of bankruptcy."
" On January 20, 2012, the Debtor received an unsolicited offer to purchase its assets from Community Healthcare Associates (" CHA" ), the entity that had purchased Barnert Hospital out of bankruptcy. CHA's proposal was joined in by Jersey City Medical Center/Liberty Health, who would become a tenant for a portion of the Hospital premises if CHA was selected as the successful purchaser."

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" Following these two expressions of interest, a significant amount of " public opinion" arose over who would be the best suitor for the Hospital. Notwithstanding, the Debtor and its Board remained committed, not just contractually, but in accordance with its best business judgment, to proceed forward to close on the Prime APA."
. . . .
" On or about January 12, 2012, the Debtor received two discouraging pieces of news: first, that the State's second quarter Charity Care advance would not be forthcoming in the first Quarter, and second, that it did not seem likely that the Debtor's CHAPA or Prime's CON applications, commenced in September of 2011 would be finalized until May or June, well into the second Quarter of 2012, and well beyond Prime's then desired closing date of March 31, 2012."
" Prime interpreted this news (rightly or wrongly) to mean that the State was not supporting the Prime transaction . . ."
" On January 25, the Debtor received word that its request for reconsideration by DOH [regarding Charity Care funds] had been denied. On January 26, 2012 . . . Prime advanced the Debtor an additional $1 million through the HFG line, which enabled the Debtor to meet its January 27 payroll."
" On Tuesday, January 31, 2012, Prime advised the Debtor that it would withdraw its bid and no longer finance the Debtor's operations by backstopping the HFG line."

Prime's Appearance in this Chapter 11 Case; Case References to Prime. The day after the February 6, 2012 petition filing the debtor moved for approval of post-petition financing and use of cash collateral. Its prepetition secured lenders appeared through HFG Health Co-4, LLC (" HFG" or " HF-4" ) as their agent ( Motion for an Interim Order, dkt. 12), which remained a very active participant in the case. The debtor stipulated in the February 7, 2012 Interim Order for post-petition financing and the use of cash collateral that HF-4 was the only prepetition lender on the debtor's revolving loan and the debtor's term loan ( Interim Order, February 7, 2012, dkt. 29, ¶ ¶ B.1 and B.6) (" Interim Order" ). Because of Prime's prepetition loans to the debtor, Prime retained an interest in the term loan debt. In relevant part the Interim Order provided:

As of the Filing Date, HFG was the only Prepetition Term Lender. However, as of the Filing Date, Prime Healthcare Services, Inc. holds certain last-out participation interests in the Prepetition Term Loan Debt in the approximate amount of $5.6 million . [Emphasis added.]

(Dkt. 29, ¶ B.6). Prime, through counsel, filed a Notice of Appearance on February 7, 2012 (dkt. 30) but did not file a proof of claim independent of that of HFG. The court approved Bid Procedures by Order entered on February 22, 2012 (dkt. 98), and an auction was conducted over a number of days (March 19-26). Prime did not submit a bid. The court held a hearing to approve the sale on March 23, 2012 and March 27, 2012 which culminated in the Sale Approval Order of March 27, 2012. Prime did not appear at the hearings to approve the sale.

State Litigation. On March 13, 2013 Prime initiated the State litigation. It is noteworthy that up to this time Prime could have sought to avail itself of Fed. R. Bankr. P. 9024 ( see Fed.R.Civ.P. 60(b)), seeking relief from the terms of the Sale Approval Order of March 27, 2012. No such effort was made, nor was any recourse by way of a request for interpretation or otherwise sought by Prime in the

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bankruptcy court, notwithstanding the persisting Sale Approval Order injunctive provisions. Prime instead chose, in Hudson's view, to collaterally attack that order.

Substantial portions of Prime's complaint allege claims for anticompetitive acts of Hudson post-petition (indeed, after the sale to Hudson was concluded) as to Prime's efforts to acquire other New Jersey hospitals, i.e., St. Michael's and St. Mary's (as well as a Rhode Island hospital). Nevertheless, both linking the allegations against Hudson regarding Christ Hospital to those other purported anticompetitive acts (i.e., Hudson's supposed modus operandi ) and complaining that Hudson had also damaged it as to Christ Hospital independent of the later anticompetitive events, Prime asserted:

First Count (Violation of the New Jersey Anti-Trust Act, N.J.S.A. 56:9-3 - Conspiracy);
Second Count (Violation of the New Jersey Anti-Trust Act, N.J.S.A. 56:9-4(a) - Monopoly);
Third Count (Tortious Interference in Contractual Relations);
Fourth Count (Tortious Interference with Prospective Economic Gain); and
Fifth Count (Unfair Competition).

Much of the purported factual footing for Prime's Christ Hospital-based claims track the August 2011 to February 2012 history of Prime's negotiation and intense efforts to acquire the hospital's assets, including: its August 2011 Letter of Intent; more than $6 million of loans to keep the hospital afloat and out of bankruptcy ; the December 2011 Prime-hospital Asset Purchase Agreement; then the Hudson ...


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