Thursday, February 16, 2017

Delaware Judge Swiftly Transfers Hospital Case

By Stephen W. Sather
Barron & Newburger, P.C.
Austin, TX

I recently wrote about a case that could not escape Delaware's gravity here.   However, a new decision from Judge  Laurie Selber Silverstein shows that it is possible to gain a transfer of venue out of The First State.    Case No. 17-10201, In re LMCHH PCP, LLC (Bankr D. Del).     

The case involved two jointly administered entities.   Louisiana Medical Center and Heart Hospital, LLC operated a hospital in Lacombe, Louisiana near New Orleans.   LMCHH PCP, LLC was the entity formed as a Physicians Group.   The hospital saw a surge in business after it was spared by the surging waters of Hurricane Katrina.  Unfortunately, when the hospital underwent a $40 million expansion, it could not cover its cost of operations.  When it could not locate a buyer outside of bankruptcy, it chose to file chapter 11.

The Debtors filed their petitions on January 31, 2017.    Two days later, on February 2, 2017, McKesson Corporation filed a Motion to Transfer Venue.   The Motion stated that  
This Court should transfer venue to the Louisiana Court because it is in the best interests of patients and the other stakeholders to have the local bankruptcy court handle the wind down, closure and potential sale/liquidation of this single hospital located in Lacombe, Louisiana. In single-location hospital and healthcare bankruptcy cases, the local bankruptcy court always is the best venue to oversee the myriad of issues that arise in these types of healthcare bankruptcy cases.
 The motion identified four other healthcare cases that had been 
transferred out of Delaware as support. 

McKesson also requested that the Court shorten the time for the hearing on the motion.   The next day the Court obliged, setting a hearing for February 15, 2017.    The Debtors elected not to contest the motion and it was granted on February 14, 2017, just fifteen days after the case was filed.

This case offers several lessons for parties wishing to have a case filed in Delaware heard closer to home.   First, speed in filing the motion is essential.    McKesson was ready with its motion just two days after the case was filed.   Second, McKesson obtained an expedited hearing.   The longer a case is pending before the motion to transfer is heard, the more likely that it will put down roots and resist being moved.   Finally, McKesson succeeded in showing local concerns unique to a single location hospital and prior Delaware precedent.    

This was a good example of a case that needed to come home.  On the one hand, it was not a particularly large case nor was it unusually complicated.   On the other hand, its single location fell under the regulatory jurisdiction of the State of Louisiana.    While this was undoubtedly a good result, it does raise the question of why it was ever filed in Delaware in the first place.

California State Court Rules That Released Parties Remain Liable For A Settlement Payment That Is Later Deemed To Be A Preferential Transfer And Is Disgorged From The Creditor

By Peter Califano
Cooper, White & Cooper, LLP
San Francisco, CA

In Coles v Glaser, 2 Cal. App. 5th 384 (2016), plaintiff Kevin Coles threatened a collection action against defendant Cascade Acceptance Corporation and defendant guarantors Barney Glaser and Fred Taylor on a loan past due.  Cascade informed Coles that it could not pay and would be unlikely to pay in the foreseeable future, resulting in a lawsuit for the unpaid loan balance and other amounts.  After being served with the complaint, Cascade wired approximately $309,000 and a settlement agreement was signed where Glaser and Taylor were released on all claims "except for obligations arising under the settlement agreement."  A week after the lawsuit was dismissed, Cascade filed bankruptcy.  The bankruptcy trustee later sued Coles for the return of the settlement payment as a preferential transfer.  Eventually, the parties compromised the claim and most of the settlement was paid over to the trustee.  Coles filed a claim in Cascade's bankruptcy case but only received a small dividend, leaving him with a significant shortfall.  Coles then sued Glaser and Taylor in state court for damages and, after a one-day bench trial, the trial court ruled in Coles' favor.  Glaser and Taylor appealed, claiming that the settlement agreement was fully performed because Cascade had paid the underlying obligation and that the guarantors received a release.  

The appellate court disagreed.  The court reasoned that this was a simple breach of contract matter and that Glaser and Taylor's were co‑obligors under the settlement agreement.  Even if their prior status as guarantors under the loan was still relevant, the court noted that the liability of a guarantor was exactly the same as the liability of an obligor for the purpose of pre-bankruptcy payments later clawed back into the estate as preferences (p. 389).  In any case, the court held that the settlement agreement had been breached because (1) the payment had not been made to Coles (it had been clawed back by the bankruptcy trustee) and (2) Glaser and Taylor had not paid Coles the amount of the clawback.  The court noted that "a preference payment is deemed by law to be no payment at all," so the defendants remained liable (p. 391).  Lastly, the court noted that based on the reasonable expectations of all parties, that it would be unfair if the Cascade creditors had to bear the burden to pay for the settlement.  


Settlement payments are never "final" until at least 91 days pass (one year for situations involving insiders) after receipt of the funds. Coles is a correct decision because a party making a preferential payment should not be allowed to hide behind a release when the settlement payment is later disgorged.  Note for drafting purposes, the scope of the release was properly narrowed in the agreement to release only pre‑settlement obligations.  To further clarify the scope of the release, a prudent drafter may also want to include a springback provision that reinstates the entire obligation if it is later determined that the settlement payment constitutes a preference. This is a very helpful case for creditors when the unexpected bankruptcy occurs and ruins a multi-party settlement.