The Clock Keeps Ticking: Time Considerations When Buying Healthcare Assets and Funding a Bankruptcy Case through Closing

Funding is critical for the debtor. The debtor usually has insufficient cash flow to maintain operations. So, it needs bridge financing to get to closing.

Equally critical for the buyer is time. The longer it takes to close on the sale, the more funding the debtor will need to maintain operations, and consequently, the more consideration the buyer ultimately will pay for the assets. More time also means increased professional fees for all parties, including the debtor and any unsecured creditors’ committee appointed in the case, which the buyer likely will be subsidizing.

Buyers attempt to limit this risk in part by setting milestones and target dates for critical events such as the auction and final court approval of the sale to the buyer. While prudent buyers plan and budget for minor delays and setbacks, often a buyer’s goal is to get to closing within 60 days or so of filing the motions to approve the DIP loan and the auction procedures.

A problem for buyers arises when minor setbacks turn into long-term delays, thereby increasing the price tag for the assets. Sales of healthcare assets are especially susceptible to delays because the healthcare industry is heavily regulated. The buyer likely will need regulatory approvals, licenses, permits, certificates and accreditations to continue operating the business post-closing—a process that often involves various government agencies at the state and federal level.

In particular, if the buyer needs to have the debtor sell or assign its Medicare provider number to the buyer, and the buyer intends to reach an agreement with the government to limit successor liability on any future claims (for example, overpayment claims or fraud claims under the False Claims Act), the negotiation and subsequent approval of any settlement agreement could take months.

For example, in the bankruptcy case of former New York hospital Our Lady of Mercy Medical Center (now part of Montefiore Medical Center), the buyer, debtor and the government spent months negotiating a global resolution. Indeed, the agreement between the parties was approved by the bankruptcy court one year after the court approved the sale to the buyer. See In re Our Lady of Mercy Med. Ctr., No. 07-10609 (Bankr. S.D.N.Y. Jul. 8, 2008).

The takeaway here is that buyers considering financing a bankruptcy case to acquire healthcare assets should carefully consider all variables that could increase time and cost. Timelines and target dates are at best educated guesses when dealing with governmental agencies and other parties whose interests may not be exclusively motivated by financial considerations.

Practice Pointers:

• If a settlement with the government is part of the process, consider carefully making a lowball offer that may only increase the time it will take to settle and get to closing. Spending too much time getting the government to accept a low offer ultimately may cost more because, even if successful, the additional time will increase legal fees and the amount of funding the debtor will need to continue operating until closing. Instead, buyers should consider making an offer that is more likely to result in a quicker global resolution. The result might not only save time, it may save money as well.
• Establish a cooperative relationship with regulatory authorities from the outset. Although it does not guarantee a swift outcome, it may help speed the process along.
• Remember that government agencies are not commercial parties with unfettered discretion. Buyers should have realistic expectations regarding the releases and other concessions they hope to get from the government. If the government says that it cannot release the buyer from certain types of claims, and research suggests that the government has never provided such a release, then the buyer likely will face an uphill battle obtaining the release.
• Be mindful of where and when the bankruptcy case commences, as the jurisdiction and the time of year may also affect the time it takes to obtain regulatory approvals or close on a sale. For example, given the number of holidays at the end of the year, it might be best to start the sale process and financing after January 1. Similarly, some jurisdictions, such as financially troubled Puerto Rico, celebrate more holidays than others.

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