Filed 01/24/Case 18?20070 BROWN RUDNICK LLP CATHRINE M. CASTALDI, #156089 ccastaldi@brownrudnick.com HONIEH OH. UDENKA, #319103 hudenka@brownrudnick.com 2211 Michelson Drive Seventh Floor Irvine, CA 92612 Telephone: (949) 752?7100 Facsimile: (949) 252-1514 Attorneys for SURPRISE VALLEY HEALTH CARE DISTRICT Doc UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF CALIFORNIA SACRAMENTO DIVISION In re: SURPRISE VALLEY HEALTH CARE DISTRICT Debtor. CASE NO. 18?20070 Chapter 9 DCN: SVH-2 MEMORANDUM OF LAW AND ARGUMENT IN SUPPORT OF RESPONSE TO ORDER TO APPEAR AND SHOW CAUSE WHY A PATIENT CARE OMBUDSMAN SHOULD NOT BE APPOINTED AND MOTION TO EXCUSE APPOINTMENT OF A PATIENT CARE OMBUDSMAN DATE: January 30, 2018 TIME: 9:30 am. CTRM: 32 Judge: Hon. Christopher D. Jaime In support of the concurrently ?led Motion 0 Excuse The Appointment Of A Patient Care Ombudsman, Surprise Valley Health Care District (?the District?) respectfully represents as follows: 12 Filed 01/24/18 Case 18-20070 DOC 1 TABLE OF CONTENTS 2 has 3 4 1. PRELIMINARY STATEMENT 2 5 2. FACTUAL BACKGROUND 2 6 A. The District A 2 7 B. Circumstances Leading to the Bankruptcy Filing 3 8 C. Protection ofPatients 4 9 3. ARGUMENT 6 10 i (1) The cause of the bankruptcy is wholly unrelated to patient care or privacy 11 issues, and the interests of the District and its patients are aligned. 7 12 (2) The presence and role of licensing and supervising entities, both at the local, state, and federal level, render the serv1ces of an ombudsman redundant 8 13 (3) There exist suf?cient internal safeguards to ensure appropriate level of care, 14 including the existence of a state?appointed ombudsman. 9 15 (4) The District has operated for over thirty years without any signi?cant patient care issues, and there is no tension between the interests of the patients and the 16 debtor. 10 17 (5) The cost of an ombudsman would place a signi?cant additional burden on the District?s limited resources. 10 18 (6) The weight of the other factors does not justify the appointment of a PCO. .11 19 4. CONCLUSION Filed 01/24/Case 18?20070 Doc TABLE OF AUTHORITIES Page(s) Federal Cases In re Alternative Family Care, 377 BR. 754 (Bankr. S.D. F1. 2007Barnwell Cty. Hosp, I No.1 1-06207, 2011 WL5443025 (Bankr. D.S.C. Nov. 8, 2011) 7, 8 In re Flagship Franchises 0fMinn., LLC, 484 BR. 759 (Bankr. D. Minn. 2013) 7, 8 In re Saber, MD. 369 BR. 631 (Bankr. D. Colo. 2007) 7, 10 In re Valley Health Sys, 381 BR. 756 (Bankr. CD. Cal. 2008) 6, 7, 8, 9, 11 Federal Statutes 11 U.S.Federal Rules of Bankruptcy Procedure Rule 2007.2 12 California Statutes Cal. Health Safety Code 32000 et seq. 2 ii 1244687 v1-034437/0001 12 Filed 01/24/Case 18?20070 Doc 1. PRELIMINARY STATEMENT In deciding this motion, the Court is faced with a single issue. The Bankruptcy Code provides that, where the debtor is a health care facility providing long-term care, the United States Trustee may appoint the State Long-Term Care Ombudsman to serve as the PCO required by the Code.1 The District, a long?term care provider, is already subject to extensive oversight by the California State Long-Term Care Ombudsman Program, as contemplated by the Bankruptcy Code. Moreover, the Bankruptcy Code grants this Court the discretion to decline to appoint a PCO where suchan appointment is unnecessary given the facts of the case.2 Here, the facilities operated by the District are subject to multiple layers of comprehensive regulatory oversight at the local, state, and federal level. This bankruptcy case was commenced because of mounting debt and a trade creditor?s levy on the District?s bank wholly unrelated to quality of patient care or privacy issues. Must the District reallocate sparse funds to the compensation of yet another PCO who will perform redundant and duplicative work? As set forth fully below, the District represents that the Bankruptcy Code does not requirewand the specific facts of this case do not warrant?the appointment of a PCO. The District respectfully requests that this Court find that the appointment patient care ombudsman is excused pursuant to sections 333 and of the Bankruptcy Code, and enter an order to that effect. 2. FACTUAL BACKGROUND A. The District The District is a special health care district formed under the California Local Healthcare District Law. Cal. Health Safety Code 32000 et seq. The District operates medical facilities known as the Surprise Valley Community Hospital (the ?Hospita and the Surprise Valley Clinic (the The District is located in Northeast California, at a 5000 foot elevation in 1 U.S.C. Unless otherwise noted, all statutory citations are to Title 11 of the United States Code (the ?Bankruptcy Code?). 211 use. 333(a)(1). 3 Declaration of Jennifer R. Hanor (the ?Hanor Declaration?) at 1] 6. 1244687 vl -034437/0001 12 Filed 01/24/Case 18?20070 Doc Cedarville, east Modoc County. Since April 16, 1986, the District has provided medical services to approximately 1,500 people in the follovving communities: Fort Bidwell, Cedarville Rancheria, Warner Mountains Indians, Lake City, Cedarville, and Eagleville. It also provides services to patients from all over Modoc County who make the arduous trip over Cedar Pass and into Surprise Valley.4 B. Circumstances Leading to the Bankruptcy Filing Like many rural health care districts, the Debtor has struggled to maintain operations in light of signi?cant economic dif?culties. it currently has debt in excess of $4,000,000, and it runs a de?cit of between $70,000 and $100,000 per month, without addressing aging accounts payable. The District does not generate enough revenue to support continued operations, let allow repayment of past due obligations.5 On December 28, 2017, facing the prospect of closing the Hospital and Clinic, the Board of Directors of the District declared a State of Fiscal Emergency due to the fact that the District?s ?nancial state jeopardizes the health, safety, and well-being of the residents of the District?s jurisdiction or service area absent protections of Chapter 9 of the Bankruptcy Code, and the fact that the District will be unable to meet its ?nancial obligations within sixty days of the resolution.6 The District has made signi?cant efforts to avoid ?ling for bankruptcy after repeatedly considering it as an option in 2014 and 2016. Moreover, the District has made efforts to address its ?scal situation by bringing on a hOSpital management company, which abandoned the hospital within several months of operation.7 Notwithstanding the ?nancial dif?culties, the Hospital and Clinic have managed to provide quality emergency services for the residents of its communities. However, the District can no longer stave off its creditors and maintain quality operations absent a bankruptcy ?ling to allow it the necessary breathing room to explore a sale of the Hospital and the Hanor Declaration at 119; Resolution 12187 (as adopted by the Board of Directors, December, 28, 2017). 7 Hanor Declaration at 1] 10. 1244687 v1~034437l0001 12 Filed 01/24/Case 18?20070 Doc generation of additional revenue streams.8 On January 3, 2018, a trade creditor, Prime Time Healthcare, levied the District?s bank accounts, jeopardizing the District?s ability to meet payroll and other ?nancial obligations as they come due.9 On January 4, 2018 (the ?Petition Date?), the District ?led a voluntary petition (the ??Petition?) under Chapter 9 of the Bankruptcy Code. The District-filed the Chapter 9 case to obtain relief from creditor collection actions and to adjust its debt obligations. It intends to propose a plan for the adjustment of its debts and the infusion of new ?nancing to support its Operations. During the bankruptcy case, the District plans to remain in possession and control of its property, and to continue providing medical services for the benefit of the public.10 C. Protection of Patients The Clinic provides out-patient services, including primary care services, immunizations, and annual physicals, while the Hospital primarily provides long-term care and acute patient services.11 The bulk of the District?s operations are its long-term care services. Of the Hospital?s twenty?six beds, twenty-two are skilled nursing beds, one is an acute bed, and there are three swing beds. The Hospital?s acute patient count is relatively low. Under current operating conditions, the Hospital?s acute ward provides critical emergency care and then stabilizes patients for transfer to a larger facility. 12 The Hospital operates an emergency room with a physician on standby at all times. The Hospital also provides a full service laboratory, X?ray services, and operates a 24-hour ambulance service with a full time paramedic on staff. Many community members are EMT?certified and serve as part-time and on-call staff during the week. While the Hospital?s services are limited, they provide essential care for patients who could not make the trip to a distant facility.1a; Id. at1113Id. at1116. 1244687 vl-034437/0001 12 Filed 01/24/Case 18?20070 Doc The District?s long-term facilities are monitored by the California Long-Term Care Ombudsman for Modoc County (the ?State Ombudsman?), whose job is to investigate and resolve complaints made by residents in long-term care facilities.?4 The state ombudsman visits and inspects the Facilities regularly and frequently.?5 Additionally, all of the District?s operations are subject to oversight by the Modoc County Health Services the California Department of Public Health and the Centers for Medicare and Medicaid Services (?@116 These agencies conduct sporadic and unannounced inspections of the Facilities, and during the 1 next 12 - 18 months, CDPH and CMS will separately conduct an impromptu inspection of the District?s facilities. The District is currently in full compliance with all state and federal re gulations. ?7 Further, the District has adopted extensive internal procedures and policies to ensure that patients receive an appropriate level of care. First, the District maintains an internal social services department. When a patient ?les a grievance, it is sent directly to this department and kept confidential from the medical staff to eliminate the potential for retaliation against the patient. The internal social services department investigates and prepares a report, which is sent directly to the Director of Nursing.18 Often, if the issue is one that cannot be immediately recti?ed, the District?s internal policies and procedures are re~evaluated and remedied with a general in?services training session by the Director of Staff Development for all medical staf .19 Additionally, patients can report complaints directly to the MCHS, CDPH, and CMS, and those agencies conduct an investigation and evaluation of patient complaints.20 There are also several internal committees and groups tasked with monitoring the quality of patient care. First, the patients hold a council once a month to discuss any issues or complaints ?4 1d. at1l 17Hanor Deciaration at?l 18-19. '3 1d. at?ZO. 1910?. 201d. at?Zl. 1244687 v1?034437/0001 12 Filed 01/24/Case 18?20070 Doc related to patient care. The Inter-Disciplinary Team (the is a committee of several staff and medical professionals who meet twice a week to discuss quality of care issues. There is a Quality Assurance committee that meets once a month to do the same, and there is a Care Conference with each patient and their medical staff every quarter, year, and every time there is a signi?cant change in the patient?s condition.21 In the thirty years since its inception, the District has had no signi?cant patient care issues. 3. ARGUMENT If a debtor is a health care business as de?ned by 11 U.S.C. 101 the Court must appoint a PCO within thirty days of the commencement of a case unless the court determines that a PCO ?is not necessary for the protection of patients under the speci?c facts of the case.?23 Where the health care business provides long-term care, the United States Trustee may appoint the State Long?Term Care Ombudsman to serve as the FCC.24 The determination of whether a PCO is unnecessary is based on ?the totality of the circumstances surrounding the bankruptcy ?ling and the operations of the debtor.?25 Speci?cally, the court must examine the operations of the debtor in light of the following nine non-exhaustive factors, and the weight to be accorded to each of the factors is left to the sound discretion of the court:26 1) the cause of the bankruptcy; 2) the presence and role of licensing or Supervising entities; 3) the debtor?s past history of patient care; 4) the ability of the patients to protect their rights; 5) the level of dependency of the patients on the facility; 6) the likelihood of tension between the interests of the patients and the debtor; 7) the potential injury to the patients if the debtor drastically reduced its level of patient care; 8) the presence and suf?ciency of internal safeguards to ensure appropriate level of care; and 9) the impact of the cost of an ombudsman on the likelihood of a successful reorganizationThat the District meets the de?nition of ?health care business? under section is not in dispute. The Bankruptcy Code de?nes ?health care business? as ?any public or private entity . . . that is primarily engaged in offering to the general public facilities and services for . . . the diagnosis or treatment of injury, deformity, or disease; and . . . surgical, drug treatment, or obstetric care; and . . . includes . . . any . . . general or specialized hospital; [and] . . . any long-term care facility. . . 11. U.S.C. 23 11 U.S.C. 333(a)(1). 2? 11 U.S.C. 25 In re Alternative Family Care, 377 BR. 754, 758 (Bankr. SD. F1. 2007). 26 In re Valley Health Syn, 381 BR. 756, 761 (Bankr. CD. Cal. 2008) (adopting the Alternative Family Care factors). 1244687 Vl-034437/0001 12 Filed 01/24/Case 18?20070 Doc The court should also consider the following additional factors: 1) the high quality of the debtor?s existing patient care; 2) the debtor?s ?nancial ability to maintain high quality patient care; 3) the existence of an internal ombudsman program to protect the rights of patients, and/or 4) the level of monitoring and oversight by federal, state, local, or professional association programs which render the services of an ombudsman redundant. Valley Health Sys, 381 BR. at 761. The requirement of a PCO is discretionary, and courts in similar cases frequently decline to compel a debtor to appoint one.27 For example, in Valley Health System, under facts analogous to ours, the Bankruptcy Court for the Central District of California considered whether a local health care district that operated three hospitals and a skilled nursing facility was required to appoint a PCO.28 in that case, the district was not even subject to the oversight of the state ombudsman. program. Yet, the court held that a PCO was unnecessary. The court was persuaded by the extent and breadth of regulatory oversight that the District was subject to.29 Like in Valley Health System, the weight of the factors and totality of the circumstances here warrant a finding that the appointment of a PCO is unnecessary. More speci?cally: (I) The cause of the bankruptcy is wholly unrelated to patient care or privacy issues. and the interests of the District and its patients are aligned. The District sought the protection of the bankruptcy court to halt creditor collection actions and to allow for the adjustment of its debts and the infusion of new ?nancing. Speci?cally, the District?s bank accounts were levied on by a trade creditor, creating the risk of a shut?down as the District was unable to meet payroll and other ?nancial obligations. The chapter 9 ?ling is unrelated to any patient care or privacy issues?the District is simply cash-strapped. Courts have 27 Alternative Family Care, 377 BR. at 761 (even though debtor was a health care business as de?ned by the code, patient care ombudsman not necessary during child care agency?s bankruptcy); Valley Health Sys., 381 B.R. at 765 (patient care ombudsman not necessary in the bankruptcy of a health care district, as district was already subject to extensive regulatory oversight and internal controls); [a re Flagship Franchises of Mina, LLC, 484 BR. 759, 766 (Bankr. D. Minn. 2013) (?nding that ?substantial safeguards? at in-home adult day care center would protect the rights and health of patients without the appointment of an ombudsman); In re Saber, MD, 369 B.R. 631 (Bankr. D. Colo. 2007) (single physician entity with twenty years? experience and in good standing excused from the appointment of a In re Barnwell Cty. Hosp, No. 1 1-06207, 201 WL5443025 (Bankr. D.S.C. Nov. 8, 2011) (chapter 9 county hospital excused from the appointment of a PCO). 23 381 BR. at 361. 29 Id. at 365. 1244687 v1~034437/0001 12 Filed 01/24/18 Case 18?20070 Doc found that where?as here-~the cause of the bankruptcy is unrelated to patient care or privacy concerns, this weight of this factor swings in favor of excusing the appointment of a PCO.30 (2) The presence and role of licensing and supervising entities, both at the local, state, and federal level, render the services of an ombudsman redundant. Several courts have been persuaded that where comprehensive governmental oversight exists, the appointment of a PCO constitutes a duplication of effort and an unnecessary strain on an already distressed entity.31 This is particularly true with respect to health care districts?2 Here, like in Valley Health Systems, the District is subject to comprehensive oversight by local, state, and federal entities. As outlined above the District?s long-term facilities are monitored by the state ombudsman, whose job is to investigate and resolve complaints made by residents in long?term care facilities. The state ombudsman visits and inspects the Facilities regularly and frequently. Additionally, all of the District?s operations are subject to oversight by the MCHS, the CDPH, and CMS. These agencies conduct sporadic and unannounced inspections of the Facilities, and within the next 12 18 months, CDPH and CMS will separately conduct an impromptu inspection of the District?s facilities. The District is currently in full compliance with all state and federal regulations. Because the District is already subject to a net of comprehensive and duplicative oversight by local, state, and federal agencies, this factor weighs against the appointment of a PCO. 30 See, e. Valley Health Sys., 381 BR. at 761 (cause of bankruptcy was the burden of servicing bonds and problems stemming from contractual relationships, therefore this factor cut in favor of excusing the appointment of a Bamwell Cry. Hosp, 2011 WL 5443025 at *5 (bankruptcy precipitated by shortfall of revenue); Alternate Family Care, 377 BR. at 759 (same); Flagship Franchises, 484 BR. at 759 (in-home adult day care center?s bankruptcy was ?led to ?renegotiate franchise agreements and to resolve the substantial unsecured debt accrued . . 31 Alternative amtly Care, 377 BR. at 759 (?nding that, where the debtor was subject to multiple layers of state and judicial oversight, ?[a]dding an ombudsman for the pendency of [the] bankruptcy would be a total duplication of the efforts of various public and private entities aiready overseeing the welfare of the {patients]). 32 Valley Health Sys, 381 HR. at 761-762 (holding that where ?the district is subject to substantial monitoring by a variety of federal and state regulatory agencies and independent accreditation associations,? and because the district is ?in substantial compliance with all applicable federal and state regulations,? this factor is met) Bamwell Cay. Hosp, 201 1 WL 5443025 at *5 (holding that this factor is satis?ed where ?[t]he debtor is subject to substantial monitoring by a variety of federal and state regulatory agencies,? independent associations, and is ?in compliance with all applicable federal and state regulations?). 1244687 12 Filed 01/24/Case 18?20070 Doc (3) There exist suf?cient internal safeguards to ensure appropriate level of cam, including the existence of a state-appointed ombudsman. Factor eight of the Alternative Family Care list is an inquiry into whether there exist suf?cient internal safeguards to ensure an appropriate level of care during the pendency of the bankruptcy.33 Courts evaluating this factor consider the internal procedures that exist for processing and resolving complaints concerning patient care,34 and whether such processes are monitored by any external agencies.35 The bulk of the District?s. operations are monitored by the state ombudsman, whose existence makes the appointment of another PCO redundant and super?uous. The portion of the District?s operations outside the purview of the state ombudsman is de minimis, but the District has nevertheleSs adopted extensive internal procedures and policies to ensure that patients receive an appropriate level of care. First, the District maintains an internal social services department. When a patient ?les a grievance, it is sent directly to this department and kept con?dential from the medical staff to eliminate the potential for retaliation against the patient. The internal social services department investigates and prepares a report, which is sent directly to the Director of Nursing. Often, if the issue is one that cannot be immediately recti?ed, the District?s internal policies and procedures are re-evaluated and remedied with a general in-services training session by the Director of Staff Development for all medical staff. Additionally, patients can?and they in fact do?report complaints directly to the MCHS, CDPH, and CMS, and those agencies conduct an investigation and evaluation of the patient?s complaints. There are also several internal committees and groups tasked with monitoring the quality cf patient care. First, the residents themselves hold a council once a month to discuss any issues or complaints related to patient care. The outcomes of these council meetings are handled by the internal social services department. The Inter-Disciplinary Team (the is a committee of several staff and medical professionals who meet twice a week to discuss and resolve quality of 33 Alternative Family Care, 377 B.R. at 760. 34 Valley Health Sys., 38} 13.11. at 762. 35 Id. 1244687 vl 12 Filed 01/24/18 Case 18?20070 Doc care issues. Furthermore, there is a Quality Assurance committee that meets once a month to do the same, and there is a Care Conference with each patient and their medical staff every quarter, year, and every time there is a signi?cant change in the patient?s condition. In addition to oversight by the state ombudsman, these internal policies and procedures make the need for a PCO wholly unnecessary, and this factor militates against appointing one. (4) The District has operated for over thirty years without any signi?cant patient care issues, and there is no tension between the interests of the patients and the debtor. In considering whether to appoint a PCO, courts are persuaded by facts indicating that a debtor has a good record of patient care. For example, one court was persuaded by the fact that the debtor had practiced for twenty years and ?[remained] in good standing in his profession.?36 The District has served communities in and around Cedarville for thirty years without any signi?cant patient care issues.37 Further, there is no tension here between the interests of the debtor and the interests of the patient. The debtor has worked tirelessly to keep the Facilities open to serve the public, and the current preceedings are intended to readjust the debtor?s ?nances such that it can continue to serve its patients. (5) The cost of an ombudsman would place a signi?cant additional burden on the District?s limited resources. Given the already complex web of monitoring that the District is subject to and the existence of a State Ombudsman, the cost of a separately appointed ombudsman would place a signi?cant ?nancial strain on the District?s resources without a commensurate bene?t to the District?s patient population. The District is focusing its limited resources on patient care and its efforts to implement a long term plan to save these medical facilities for the Community. 36 Saber, 369 BR. at 638. 37 See Hanor Declaration at 23. 10 1244687 v1?034437/0001 12 Filed 01/24/18 Case 18?20070 Doc (6) The weight of the other factors does not iustify the appointment of a PCO. The Alternative Family Care factors include i) the ability of patients to protect their rights, ii) the level of dependency of the patients on the facility, and the potential injury to the patients if the debtor drastically reduced its level of patient care.38 As outlined above, the District is already subject to a comprehensive web of regulatory oversight and monitoring. The appointment of a PCO will not resolve the concerns animating these factors. First, patients are well?able to protect their rights because they are able to report complaints directly to the MCPH, CDPH, and CMS. Additionally, all long?term care residents can report concerns directly to the state ombudsman. Appointing another ombudsman will merely add a redundant layer of bureaucracy, rather than strengthen patients? ability to protect their rights. Similarly, the appointment of a PCO will not ameliorate the patients? level of dependency. Rather, the regulatory oversight already in place serves to protect the quality of patient care and to ensure that in no circumstance can the District drastically reduce its level of patient care. In Alternative Family Care, and other cases,39 courts have held that the appointment of a PCO is unnecessary even where these factors weigh in favor of appointing one.40 Here, the District has demonstrated that the appointment of an additional PCO would not impact these factors. In any event, the case law demonstrates that these factors are non-dispositive. The weight of the Alternative Family Care test swings in favor of excusing the appointment of a PCO, and the District respectfully requests that this Court so hold. 38 377 BR. at 758. 39 See, Valley Health Syn, 381 BR. at 763-64 (explaining that ?[g]iven the range of services offered by the hospitals and skilled nursing facility, the patients under the District?s care and supervision are highly dependent on the District for their health, safety, and welfare? and that ?a drastic reduction in the quality of care creates a significant risk for patients? holding nevertheless that the appointment of a patient care ombudsman is unnecessary). 40 Alternative Family Care, 377 BR. at 760 (explaining that the children-patients in that case were ?incapable of articulating and protecting their interests? and were therefore particularly vulnerable to abuse, unlike other patients who ?[have] the faculties to preserve their interests,? holding nevertheless that the appointment of a PCO was unnecessary given the facts of the case). 1 1 1244687 v1?034437/0001 12 Filed 01/24/Case 18?20070 Doc 4. CONCLUSION WHEREFORE, the District respectfully requests that this Court ?nd that a PCO is unnecessary under the facts of this case and enter an order to that effect pursuant to 11 U.S.C. 333 and Bankruptcy Rule 2007.2. DATED: January 24, 2018 BROWN RUDNICK LLP 4 gig CATHRINE CASTALDI Attorney for the Debtor SURPRISE VALLEY HEALTH CARE DISTRICT 12 1 1244687 I ?03443 7/0001 12