Imperial Valley Coalition for Sustainable Healthcare Facilities

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Bankruptcy for ECRMC, Is It Time?

At a recent Imperial Valley Healthcare District board meeting, the CEO of ECRMC strongly rejected any consideration on a bankruptcy as part of the negotiation. He cited that he could not do that to the ECRMC employees or the local vender. As the readers now know, ECRMC has an approximate $200 million debt and still is average over $1 million average monthly loss. Bankruptcy is a difficult and multi-faceted decision. Bankruptcy brings images of doors/windows boarded up, staff layoffs, liquidation of property. It comes with stigma, fear, and anxiety. Consider some facts. 

Under the terms of ECRMCs bond, Chapter 9 of the Bankruptcy Code is the section of law that addresses a potential bankruptcy. Chapter 9 is for a “Municipal Bankruptcy”. This chapter provides a financially distressed municipality protection from its creditors while it negotiates a plan for reorganizing its debts. Reorganization is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt. There is no provision for liquidation of the assets of the municipality and distribution of the proceeds to creditors. 

This is very similar to Chapter 11 or 13 Bankruptcy which involves a reorganization of debt and protects assets. Chapter 7 is a liquidation of assets to pay creditors. Consequently, these chapters do not apply. 

Is Chapter 9 bankruptcy an option for ECRMC? 

The first question to ask is whether ECRMC is eligible under Chapter 9. The following criteria must be met: 

  • The municipality must be insolvent, defined as generally not paying debts or unable to pay debts when due. 
  • The municipality must want to file; Chapter 9 is voluntary and cannot be forced into bankruptcy by its creditors. 
  • The municipality must have, attempted to negotiate with its creditors, reached impasse or that negotiations would be futile. 
  • The municipality must affect a plan to adjust debts. 

ECRMC may appear to be insolvent with a projected budget deficit for 2023-2024 of $9.4 million. Debts are being paid. In December the bond holder brought in a financial consultant to plan the steps for a structured bankruptcy. ECRMC then hired those two individuals to manage the hospital. The financial consultant left and UCSD’s prior management agreement was renewed. Chapter 9 bankruptcy was stated not a consideration. 

If the Board of ECRMC did file for bankruptcy and met all the conditions, what happens to the outstanding bond debt? This gets a bit legal so here is the citation of law for you to check. 

Special revenue bonds will continue to be secured and serviced during the chapter 9 case through continuing payment of ongoing special revenues (11 U.S.C. § 928). Holders of special revenue bonds can expect to receive payment. The application of pledged special revenues to indebtedness secured by such revenues is not stayed as long as the pledge is consistent with 11 U.S.C. § 928 [§ 922(d) which ensures that a lien of special revenues is subordinate to the operating expenses of the project or system from which the revenues are derived (11 U.S.C. § 922(d)). 

In other words, business as usual will continue as the reorganization takes place to include employment for the valued medical teams. The concern for the ECRMC employees seems smoke and mirrors. For those retired employees, their pension payment continues. For those yet to retire, they are first in line for court to allocate payment, followed by the bond company, and then vendors—local and otherwise. 

So, the question remains “Should ECRMC consider bankruptcy as an option?” The pros/cons must be weighed against the survival of the hospital. These issues include the stigma, cost of filing, impaired access to capital markets, increased publicity, scrutiny, or problems with vendors, creditors, employees, and collective bargaining agreements. The unknown factor is loss of patient and family confidence in their healthcare system. Based on the patient census number that has already commenced. 

All of us living here with current or future medical care needs must consider these unpleasant consequences when the healthcare of Imperial County is on the scales. Since the decision to seek bankruptcy protection is solely in the hands of the ECRMC seven-member board, we must question their real intent in this single healthcare district action.

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