Creditors challenge $30M in state aid for Steward hospitals
Image I Courtesy of Chris Lisinski/State House News Service
Status of Steward hospitals amid bankruptcy
A group of companies that are owed money from bankrupt Steward Health Care want a judge to mandate changes to the agreement that Massachusetts state government has to provide $30 million to support Steward hospitals "as they are transitioned to new operators in the near-term," taking issue with the way the deal gives the state the power to claw back the money.
The Official Committee of Unsecured Creditors, appointed to represent some of the people and companies with the largest unsecured claims during the bankruptcy proceedings, lodged a "limited objection" late Monday, arguing that the state support to help keep open the five Steward hospitals (six campuses) that received qualified bids as part of the bankrupt company's sales process "is illusory, and while it may provide near-term (and important) assistance in transitioning the Massachusetts Going Concern Hospitals to purchasers, it will do so at the expense of the rest of the Debtors, their estates and their creditors."
The $30 million comes in the form of advances on Medicaid funds that the state owes Steward hospitals, and the committee said it is worried that the agreement gives Massachusetts "the unfettered ability to recoup or demand repayment of the funds ... and to assert these obligations against all of the Debtors on a joint and several basis - even those Debtors that are not receiving the benefit of any Payments under the Payment Agreement."
"The Commonwealth has been clear in politically-charged public statements that it has concerns about the facts and circumstances surrounding the commencement of these Chapter 11 Cases, including alleged 'greed and mismanagement' on the part of the Debtors. While potentially intended to accommodate these concerns, the terms of the Payment Agreement, under which the Commonwealth can later seek recoupment of the funds from every single Debtor without having to step another foot in front of this Court, puts the rest of these Chapter 11 Cases at risk and places undue burden on the very people that provided (and continue to provide) essential services and goods to the Debtors’ hospitals, including those in Massachusetts," lawyers for the group of creditors wrote.
The committee said it supports the goal of the $30 million advance, to keep most of Steward's Massachusetts hospitals open while sales are finalized, but argued in its filing that "the Commonwealth should not be permitted to leverage the desperate situation in which the Debtors find themselves - unable to fund substantial operating losses pending the consummation of sales for the Massachusetts [hospitals that have qualified bids] - at the expense of the remaining Debtors' estates."
And while Steward said in a filing of its own last Friday that it does not anticipate that Massachusetts will seek to recoup the $30 million, the unsecured creditors' committee said it "is very concerned that the Commonwealth has been unwilling to provide a binding commitment" to that effect.
"If the Commonwealth, notwithstanding the Debtors' representations, elects to exercise its recoupment or repayment rights under the Payment Agreement, the Debtors would face a severe liquidity crisis that would imperil the administration of these chapter 11 cases," the committee wrote.
U.S. Bankruptcy Court Judge Christopher Lopez will hold a hearing at 2 p.m. ET Wednesday on the motion related to the funding from Massachusetts, the planned closures of Carney Hospital and Nashoba Valley Medical Center in Ayer, and the proposed rejection of Steward's master leases.
Schuyler Carroll, a bankruptcy partner at Manatt, Phelps & Phillips, laid out his predictions for Wednesday's hearing during a webinar hosted Tuesday by the Massachusetts Health and Hospital Association.
Carroll said the court on Wednesday will likely approve the Carney and Nashoba closures, the rejection of Steward's master lease governing rent payments on the land where it operates hospitals, and the $30 million in advance state payments from state government in Massachusetts to the Steward hospitals.
"I don't expect that the court will get involved specifically with the details of the closure plan, but the court will want to see what the debtors have already filed - that they do have a closure plan in place and hopefully that no one is objecting to either the closure itself, or the closure plan," Carroll said. "If no one objects, and obviously the state and regulators have been very involved in this process so if they were to object the court would be very interested in their objection, but in addition the lack of an objection is something the court will take into account, and likely approve it. In fact, I wouldn't be surprised as long as there are no objections from the state or local regulators that the court approves it even if somebody else objects."
Carroll said the rejection of the master leases "is also something that the court is likely to approve" even if the landlord objects. He said none of the parties that have made bids for Steward's Massachusetts hospitals have offered to take on current lease payments.
"The standard is favorable to the debtor. In this case, there's no question that the lease payments are significantly higher than current market rates," Carroll said. "Every bidder that has made an offer for any of the hospitals has asked for significant rent concessions or to purchase the real property and to do so at a significant discount. The debtors have gone out to the market and have actually found what they believe are the current market rates for similar properties. Obviously, there aren't a whole lot of comparables, but they believe that they are significantly above market rates. Because of that it's highly likely that the court will approve the rejection."
Carroll said the hospital landlords at Medical Properties Trust won't surrender the property, "but the bidders and Steward are in negotiations now with MPT to try and reach agreement, and the agreement would be on either a reduced rental or a potential purchase of the real estate." Another bankruptcy court judge may act as a mediator, he said, to persuade each side to come closer to an agreement through "shuttle diplomacy."
"It is very often done in Houston," Carroll said. "It is very often done with the judge who has been appointed."
Attorney General Andrea Campbell's office, along with the Healey administration's Executive Office of Health and Human Services, filed a statement with the court ahead of Wednesday's hearing. The offices said that Steward landlord Medical Properties Trust and their partner Macquarie Asset Management "are trying to block possible transactions to transition Steward’s Massachusetts Hospitals to new operators to extract concessions from the Steward estate and their mortgage."
"To be clear, the Commonwealth is doing its part, while others are not. Massachusetts' MassHealth program is making various payments totaling approximately $30 million, which will provide liquidity for the month of August, if, by July 31, the parties progress to binding agreements that include a path to ownership of both real and personal property for the bidders," the state offices wrote. "The liquidity to be provided by the Commonwealth is a significant benefit to the estate in preserving value. The parties in interest should move quickly to meet the conditions to receive this benefit."
In a footnote connected to its contention that "others are not" doing their part, the AG's office and EOHHS said that "Creditors seeking to reap the financial rewards of a Stewardship transaction (80% of which is based in Massachusetts) remain unwilling to shoulder any further burden of preserving their alleged 'collateral' and are unwilling to share the burden of funding operating losses for Steward’s Massachusetts hospitals to provide just a bit more time to get to a consensual resolution."
In other footnotes, Campbell's office and EOHHS said they would like to see Lopez modify Steward's proposed closure procedures for Carney Hospital and Nashoba Valley Medical Center to remove requirements that the Department of Public Health hold public hearings eight days prior to the closures and that Massachusetts issue a determination that the hospitals may close five days prior to the planned closures.
"There is no such requirement under Massachusetts law and the Commonwealth cannot be compelled to take such action," they said about the state's determination.
"While there is a requirement to hold a public hearing, there is no timing requirement under Massachusetts’ law for the holding of such hearing. Thus, the Department of Public Health will coordinate with stakeholders and schedule public hearings at times and places that make sense," Campbell's office and EOHHS wrote.
Manatt, Phelps & Phillips partner Eric Gold, who previously worked as chief of the Health Care Division at the Massachusetts Attorney General’s office, said on Tuesday's MHA webinar that the judge on Wednesday could determine when the closures can take place.
"I think it's possible that the judge could tell Steward they have to keep it open for longer than 30 days. But Steward has basically said that they're out of money and that every day they operate those hospitals they're losing money and that the safest way to care for the patients is to close the hospitals in an orderly way over the next 30 days," he said.
Any creditor could object, he said, predicting some objections and opportunities for lawyers to cross-examine Steward witnesses.
"It's not clear if the Commonwealth will object to that closure schedule. Steward has suggested that the Commonwealth will not, but I wouldn't be surprised to see a response by DPH, at least suggesting that Steward can be and should be doing more to facilitate the orderly closure of those facilities," Gold said.
The 1199SEIU United Healthcare Workers East union also filed on Tuesday a "statement and reservation of rights" related to the agreement between Massachusetts and Steward and the plan to close Carney Hospital and Nashoba Valley Medical Center. The union said it represents about 5,000 Steward employees, including some Carney and Nashoba Valley employees who are working under a collective bargaining agreement that extends until Oct. 31, 2025.
That contract, the union said, "entitles bargaining unit members to severance pay and the payment of unused accrued paid time off ('PTO') upon being laid off from any Massachusetts Hospital, including in the event of closure."
But Steward, which has not moved to have the CBA rejected under the Bankruptcy Code, has "not confirmed that they intend to pay severance and PTO in the ordinary course to Employees who are laid off from Carney Hospital and Nashoba Valley Medical Center," the union said.
"Lives are at risk, as care is being pushed miles away and emergency room capacities will be strained beyond the breaking point," the union wrote. "The future of healthcare in Massachusetts is at stake, and the healthcare workers of 1199SEIU strongly urge all key financial stakeholders to go back to the table and commit the funding necessary to fully explore transition alternatives and establish and implement a closure plan that protects patients and helps mitigate the consequences of reduced care in these communities."
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