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December 23, 2020 – The Court hearing the Astria Health cases issued an order confirming the Debtors' Modified Second Amended Plan [Docket No. 2217].
Following the closure of its unprofitable SHC Medical Center–Yakima (dba Astria Regional Medical Center or "ARMC," which failed to attract a going concern buyer) and a settlement reached with eventual Plan co-proponents Lapis Advisers, LP ("Lapis"), the Debtors anticipate emerging with two remaining community-focused hospitals; Astria Sunnyside Hospital and Astria Toppenish Hospital.
On May 6, 2019, Astria Health and 13 affiliated Debtors (“Astria” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Eastern District of Washington, lead case number 19-01189. At filing, the Debtors, the largest non-profit healthcare system based in eastern Washington, noted estimated assets between $100.0mn and $500.0mn, and estimated liabilities between $100.0mn and $500.0mn. In a subsequently filed Schedule A/B, the lead Debtor noted $351k of assets and $12.7mn of liabilities [Docket No. 302].
The Debtors' memorandum in support of Plan confirmation [Docket No. 2124] provides: "The Plan filed by the Debtors and the Lapis Parties as co-Plan Proponents, provides for a restructuring and reorganization of the Debtors’ operating facilities that will enable the operating Debtors to emerge from chapter 11 as a well-capitalized healthcare system that is positioned for long-term success. Confirmation of the Plan will also preserve critical patient care for communities in the Yakima Valley and jobs for their employees, and will maximize the value of the Debtors’ Estates for all creditors with Allowed Claims.
The cornerstones of the Plan are compromises among the Debtors, the Lapis Parties, and the Official Committee of Unsecured Creditors. These compromises are the result of successful and substantial negotiations among these major constituents in these Chapter 11 Cases. In particular, the Lapis Parties have agreed, as part of the Plan, to reinstatement and repayment of their secured claims over time in accordance with the terms of the Exchange Debt Documents including their claims for debtor-in-possession financing that, absent these arrangements, would have to be paid in full in cash on the Effective Date. Meanwhile, the Plan Proponents and the Committee resolved several issues the Committee raised relating to confirmation of the Plan and the treatment of Holders of General Unsecured Claims. The resulting Plan maximizes the value of the ultimate recoveries to all creditor groups on a fair and equitable basis, settles significant claims against the Debtors on terms that are fair, reasonable, and in the best interests of the Debtors’ Estates and creditors, pays Allowed Administrative Claims and Priority Claims in full, and provides for a recovery of at least $7.3 million to the holders of the Allowed General Unsecured Claims."
The Disclosure Statement [Docket No. 1987] provides: “The Plan is built around the following key elements:
- The Debtors will be deemed consolidated for the sole purpose of treatment of Claims and liabilities under a single Plan, but will otherwise retain the separate corporate structure of individual Debtors (and any other Debtor not included therein shall be treated under a separate Plan).
- AH NP 2, a Washington non-profit corporation and currently a wholly owned non-debtor subsidiary of Astria, will become the sole member of Astria; and Astria will change from a no-member non-profit corporation to a single member non-profit corporation
- A newly created non-debtor entity, AH System, a freestanding Washington non-profit corporation, will assume the non-discharged debt of the Debtors in exchange for AH NP 2’s transfer of its sole membership interest in Astria to AH System.
- The Lapis Parties have agreed to reinstatement of the Senior Secured Bond Debt Claims which will be paid by the Reorganized Debtors over time.
- AH System will issue debt instruments…to satisfy the DIP Claims and Senior Secured Credit Agreement Claims in full.
- A GUC Distribution Trust will be created to pursue all Avoidance Actions, (other than any Avoidance Actions against the Debtors’ vendor that provided revenue cycle, billing and collection services to the Debtors pre-petition and as of the Petition Date (collectively with such vendor’s affiliates, the ‘Vendor’)), reconcile General Unsecured Claims, receive certain assets from the Debtors and/or Reorganized Debtors (including the Initial GUC Distribution Amount of $5 million and additional funds totaling not less than $2.3 million) and make pro rata distributions to Holders of General Unsecured Claims consistent with the terms of the Plan.
- A Liquidation Trust (together with the GUC Distribution Trust, the ‘Plan Trusts’ and each individually, a ‘Plan Trust’) will be created from assets of the Debtors not necessary for the operation of their core health care businesses or constituting GUC Distribution Trust Assets under the Plan. In the event any assets in the Liquidation Trust are liquidated, the proceeds of such liquidation shall be used to fund AH System’s operating cash account up to an amount equal to the lesser of $10 million or 30 days cash on hand and then to pay debt issued by AH System.
- Holders of Allowed Claims will receive a distribution of Cash or proceeds from the applicable Plan Trust, consistent with the priority provisions of the Bankruptcy Code.
- All Intercompany Claims will be expunged and eliminated through the limited consolidation of the Debtors for purposes of treatment of Claims and distributions under the Plan.
- The Debtors will proceed with the Closure Plan of SHC Medical Center – Yakima, doing business as Astria Regional Medical Center (‘ARMC’ or the ‘Medical Center’) in Yakima, Washington, and dissolve the non-operating Debtors relating thereto.”
The modified Amended Plan also adds the following definition, "Supplemental GUC Distribution Amount means Cash in the amount of six hundred thousand dollars ($600,000), which shall be paid by the Reorganized Debtors to the GUC Distribution Trust through three (3) equal installment payments of two hundred thousand dollars ($200,000) on each of the first, second and third anniversaries of the Effective Date of the Plan. The Reorganized Debtors are only obligated to pay the Supplemental GUC Distribution Amount to the GUC Distribution Trust if the Multicare Transaction Payment is funded and irrevocably released to the Lapis Parties by the Effective Date."
The following is an updated summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):
- Class 1 (“Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 2A (“Senior Secured Bond Debt Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $43,571,500.00. In accordance with the Senior Debt 9019 Settlement, unless the Multicare Transaction Payment has been funded and irrevocably released to the Lapis Parties by the Multicare Funding Deadline, all Senior Secured Bond Debt Claims shall be Allowed and reinstated without setoff, reduction or subordination on the terms of the Exchange Debt Documents in the amount of all such Senior Secured Bond Debt Claims as of the Effective Date. In the event the Multicare Transaction Payment is funded and irrevocably released to the Lapis Parties by the Multicare Funding Deadline all Senior Secured Bond Debt Claims shall be Allowed and paid in full in cash on the Effective Date.
- Class 2B (“Senior Secured Credit Agreement Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $13,162,397.26. In accordance with the Senior Debt 9019 Settlement, unless the Multicare Transaction Payment has been funded and irrevocably released to the Lapis Parties by the Multicare Funding Deadline, all Senior Secured Credit Agreement Claims will be Allowed and satisfied, without setoff, reduction, subordination or challenge, by the exchange of all Senior Secured Credit Agreement Claims for Senior Secured Credit Agreement Exchange Debt with the attributes described in the schedule attached to the Plan in Exhibit A in the amount of all Senior Secured Credit Agreement Claims as of the Effective Date. In the event the Multicare Transaction Payment is funded and irrevocably released to the Lapis Parties by the Multicare Funding Deadline, all Senior Secured Credit Agreement Claims shall be Allowed and paid in full in cash on the Effective Date.
- Class 2C (“Other Secured Claims”) is impaired and entitled to vote on the Plan. On or as soon as practicable after the Effective Date, each Holder of an Other Secured Claim will receive from the assets of the Debtors, at the discretion of the Debtors, (i) cash equal to the full amount of its Claim, (ii) a reinstated note on the same payment and collateral terms as its prior Claim, (iii) a return of collateral securing the Claim against the Debtor, with any deficiency to result in a General Unsecured Claim, or (iv) such less favorable treatment to which the Holder otherwise agrees.
- Class 3 (“Convenience Class Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1,611,501 assuming all claimants with Claims between $5,000 and $10,000 elect Class 3 treatment. These Holders will be paid 20% of the allowed amount of the claim up to a maximum of $1,000 on the Effective Date or as soon as practicable thereafter. There shall be no limitation on the number of Convenience Class members.
- Class 4 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $101,950,399.80. Holders of General Unsecured Claims will receive, on one or more GUC Distribution Dates, a Pro Rata share of the Net GUC Distribution Trust Assets.
- Class 4A (“Insured Claims”) is impaired and entitled to vote on the Plan. Subject to the terms and conditions set forth in in the Plan, Holders of Insured Claims in Class 4A will recover only from available insurance, and the Debtors will be discharged to the extent of any such excess. As of the Effective Date, all Insured Claims are disputed.
- Class 5 (“Intercompany Claims”) All intercompany claims shall be expunged and eliminated through the limited consolidation of the Debtors for purposes of treatment of Claims and distributions under the Plan.
On December 11, 2020, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 2121], which were as follows.
- Class 2A (“Senior Secured Bond Debt Claims”): 1 claim holder, representing $36,732,417.00 (100%) in amount and 100% in number, voted in favor of the Plan.
- Class 2B (“Senior Secured Credit Agreement Claims”) 1 claim holder, representing $10,477,534.25 (100%) in amount and 100% in number, voted in favor of the Plan.
- Class 2C (“Other Secured Claims”) 8 claim holders, representing $3,310,212.33 (or 93.33%) in amount and 88.89% in number, accepted the Plan. 1 claim holder, representing $236,408.70 (or 6.67%) in amount and 11.11% in number, rejected the Plan.
- Class 3 (“Convenience Class Claims”) 85 claim holders, representing $206,625.91 (or 97.62%) in amount and 97.70% in number, accepted the Plan. 2 claim holders, representing $5,035.00 (or 2.38%) in amount and 2.30% in number, rejected the Plan.
- Class 4 (“General Unsecured Claims”) 79 claim holders, representing $16,018,320.45 (or 72.36%) in amount and 87.78% in number, accepted the Plan. 11 claim holders, representing $6,119,825.07 (or 27.64%) in amount and 12.22% in number, rejected the Plan.
- Class 4A (“Insured Claims”) Not tabulated.
The following documents were attached to the Disclosure Statement [Docket No. 1987]
- Exhibit A: First Amended Joint Chapter 11 Plan of Reorganization
- Exhibit B: Liquidation Analysis
- Exhibit C: Financial Projections
The Debtors filed Plan Supplements at Docket Nos. 2043 and 2197 which attached the following documents:
Docket No. 2043
- Exhibit A: Schedule of Assumed Agreements
- Exhibit B: Schedule of Insurance Policies
- Exhibit C: List of directors for Reorganized Debtors
- Exhibit D: Exchange Debt Documents
- Exhibit E: GUC Distribution Trust Agreement
- Exhibit F: Liquidation Trust Agreement
- Exhibit G: Term Sheet
- Exhibit H: D&O Cause of Action Agreement
- Exhibit I: Revised Financial Projections
Docket No. 2197
- Exhibit A: Multicare Credit Agreement
- Exhibit B: Exit Loan Escrow Agreement
Petition Date Perspective
In a press release announcing the filing, Astria Health advised that it had filed for Chapter 11 protection “to restructure its finances, give it time to replace its existing corporate billing office company with another company, and enter into a plan of reorganization with its creditors.
In the press release and the Gallagher Declaration (see below), the Debtors leave no doubt as to where responsibility for their financial plight lies, a company engaged to manage a new billing system. The press release continues, “Astria Health converted to a new Electronic Health Record (EHR) system last year after purchasing the two new hospitals. At the time of the conversion, Astria Health also contracted with a company to manage the revenue cycle including business office billing, claims processing, and collecting. That firm’s business office has managed the hospitals’ and health centers’ billing, claims processing and collecting since August 2018. They promised accounts receivables (AR) would return to pre-transition levels quickly after implementation with minimal negative cashflow impact from the transition. The two parties agreed upon specific performance guarantees for accounts receivable and cash collections that the business office operation has not met.
Astria Health has realized considerable positive performance at all three hospitals since purchasing the two new hospitals in September 2017. However, the large amount of unprocessed accounts receivable (AR) value trapped in the contracted business office operation has taken much longer to process than agreed upon. This has resulted in a significant shortfall in cashflow which we are addressing through this process. Although hospital leadership has actively managed the supply chain to ensure necessary supplies for patient care, this delay in cash collections has now become severe enough to potentially disrupt the organization’s ability to pay for crucial items in a timely manner.
The organization’s goal is to emerge from Chapter 11 by year end 2019.”
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Gallagher Declaration”), John M. Gallagher, Astria’s President and Chief Executive Officer, detailed the events leading to the Debtors’ Chapter 11 filing.
The Gallagher declaration states, "Astria did well financially when it only owned Sunnyside.
However certain issues arose in connection with Astria’s acquisitions of SHC Yakima and SHC Toppenish resulting in significant financial setback for Astria. During the acquisition process, the Washington State Department of Health CON Program unexpectedly, and in Astria’s view arbitrarily and improperly, moved the approval of the CON of a sale from an expedited approval process, as required in regulations and precedent, to a public hearing process. This, in turn, created extended uncertainty, and resulted in a degradation of EBITDA of approximately $12 million annually. The full impact of this harm did not become apparent until September 7, 2017.
Of greater significance, in preparation for its acquisitions of SHC Yakima and SHC Toppenish, Astria contracted for a new system-wide Electronic Health Record ('EHR') platform for ambulatory and inpatient services for all three Hospitals and their clinics. Shortly thereafter, Astria also contracted for the outsourcing of its revenue cycle, billing and collection functions and extended business office services. In connection with the system conversion and the outsourcing of its revenue cycle functions, Astria has experienced certain unexpected challenges including, among other things, a significant decline in cash flow from collections on accounts receivable. Astria’s lack of cash flow has caused Astria to default or otherwise fall behind on its obligations to lenders and creditors, which in turn has significantly limited its liquidity and, in turn, caused the need for chapter 11 protections. For example, on April 23, 2019, Lapis sent Astria a notice of default.
In addition, the Debtors defaulted or otherwise missed financial covenants under their facility with MidCap. MidCap has not agreed to waive certain defaults but, instead, has increased the borrowing base reserves under the MidCap Credit Agreement resulting in the reduction of the borrowing base as well as the reduction of cash available to the Debtors. The borrowing base under the MidCap Credit Agreement is calculated based upon aged A/R that are further reduced for certain aging categories and payor classes. As a result, the availability to the Debtors under the MidCap Credit Agreement is significantly less than the net A/R for Yakima and Toppenish, which serve as collateral for the MidCap Credit Agreement. This in turn, has created significant liquidity restrictions and has placed Astria in further financial distress.
Committee Objection and Settlement
The Plan and Disclosure Statement now reflect the terms of a settlement reached with the Official Committee of Unsecured Creditors (the “Committee Plan Settlement”) that results in changes to the proposed treatment of General Unsecured Creditors. The Amended Disclosure Statement reads, “The Plan also embodies the Committee Plan Settlement set forth in the Term Sheet. The treatment of General Unsecured Claims provided for herein consistent with the Term Sheet reflects a compromise and settlement of numerous complex issues including, but not limited to, those set forth in the Limited Objection of Official Committee of Unsecured Creditors (more on objection below) to Motion for an Order Approving: (i) Proposed Disclosure Statement; (ii) Solicitation and Voting Procedures; (iii) Notice and Objection Procedure for Confirmation of Joint Plan of Reorganization; and (iv) Granting Related Relief filed at Docket No. 1624. The Committee Plan Settlement provides final resolution of all issues relating to the treatment of General Unsecured Claims under this Plan. The Plan shall constitute a motion to approve the Committee Plan Settlement pursuant to Bankruptcy Rule 9019 and a finding by the Bankruptcy Court that the Committee Plan Settlement is in the best interest of the Debtors and their Estates.”
In its July 30, 2020 limited objection to approval of the adequacy of the Disclosure Statement for the Initial Plan [Docket No. 624], the Committee stated, “The Debtors’ Plan, negotiated among the Debtors and their secured creditors Lapis Advisers, LP (‘Lapis’) and UMB Bank, N.A. (‘UMB,’ and together with Lapis and UMB, the ‘Plan Proponents’) to the Committee’s exclusion, is deeply flawed and fails to meet the confirmation requirements of section 1129 of the Bankruptcy Code.
Notwithstanding the fact that the Debtors, on a consolidated basis, may be in the best financial position in years as a result of closure of SHC Medical Center – Yakima and the Debtors collectively hold approximately $29 million of cash on hand (based on recent operating reports), the proposed Plan allocates all of the Debtors’ distributable value to the reorganized Debtors and the Debtors’ secured creditors while providing the Class 4 general unsecured creditors only a pro rata share of any proceeds of the estates’ avoidance actions arising under chapter 5 of the Bankruptcy Code, which would result in the mere redistribution of potential litigation proceeds within the general unsecured class.
The Committee intends to demonstrate through discovery to be conducted in this contested matter that the Debtors’ total enterprise value, combined with other distributable assets, exceeds the secured debt and administrative and priority claims as of the projected effective date of the Plan. This ‘excess’ value should be shared by the Class 4 general unsecured creditors consistent with the provisions of section 1129 of the Bankruptcy Code. Accordingly, as currently structured, the Plan is not in the best interests of, or fair and equitable with respect to, the Class 4 general unsecured creditors, and should not be confirmed.”
Liquidation Analysis (See Disclosure Statement [Docket No. 1987] Exhibit B for notes)
About the Debtors
According to the Debtors: “The Astria Health system, headquartered in the heart of the state of Washington’s wine country in the beautiful Yakima Valley, is the largest non-profit healthcare system based in Eastern Washington. Astria Health is the parent non-profit organization of Astria Sunnyside Hospital and Astria Toppenish Hospital and delivers care throughout the Valley through its Astria Health Hospitals and its Astria Ambulatory Care model focused on delivering the highest level of ambulatory and outpatient care in convenient locations in both the Lower and Upper Yakima Valley. Astria Ambulatory Care is designed to meet the changing lifestyles and diverse needs of those living and working throughout the region.
Astria Health delivers both inpatient hospital care and emergency services, ambulatory care, and outpatient services throughout the Yakima Valley. Inpatient Hospital and Emergency care is provided at two community-focused Astria Health Hospitals; Astria Sunnyside Hospital and Astria Toppenish Hospital. Astria Health’s continuum of care services include hospitals, outpatient Astria Health Centers (14 medical clinics and 24 specialty clinics), Ambulatory Surgical Centers, Astria Hearing and Speech, Astria Home Health and Hospice, and medical services customized specifically for the region and based on specific community need. The Astria Health system ensures healthcare sites and providers are conveniently located in towns and cities throughout the Region to ensure convenient access to quality healthcare at all times.”
Prepetition Corporate Structure Chart (See Docket No. 1986)
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