LRGHealthcare – Creditors’ Committee Objects Use of Cash Collateral, Argues Payment of Interest and Fees Risks Administrative Insolvency, Prospects for Asset Sale and Quality of Patient Care

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November 13, 2020 – The Debtor's Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtor's proposed use of cash collateral [Docket No. 201], arguing that the Debtors are risking administrative insolvency, and in doing so putting their sale process in jeopardy, by offering to pay interest and fees to lender KeyBank (the "Lender") and the Department of Housing and Urban Development ("HUD") in connection with the proposed use of cash collateral. The Committee notes that each of the Lender and HUD are "woefully undersecured" and hence barred from receiving payment of interest and fees; and that regardless, the Debtor should not be allowed to make those payments when "when doing so threatens the stability of the entire chapter 11 case."

The Committee’s objection states, “The Committee supports entry of a cash collateral order that protects the interests of the Debtor’s estate and the creditors therein, while paving the way for consummation of the Debtor’s sale process and a resolution of this chapter 11 case. To that end, the Debtor, the Committee, KeyBank National Association (the ‘Lender’) and the U.S. Department of Housing and Urban Development Federal Housing Administration (‘HUD’) have worked to significantly narrow the open issues regarding the Debtor’s use of cash collateral.

Despite this progress, the as-filed version of the proposed second interim cash collateral order [Docket No. 199] (the ‘Debtor Proposed Order’) continues to leave the estate in peril of administrative insolvency and potentially jeopardizes the Debtor’s ability to provide the highest level of patient care by providing an unnecessary and overreaching adequate protection package to the Lender and HUD…In short, the Debtor’s liquidity is strained and its ability to reach the conclusion of a sale process will be severely hindered under the terms of the Debtor Proposed Order. This is evident from the nine (9) week budget ending January 2, 2021 (the ‘9 Week Budget’) attached as Exhibit A to the Debtor Proposed Order. Ending cash for the weeks ending December 19, 2020 (Week 8) and January 2, 2021 (Week 9) is only $638,704 and $1,185,314, respectively. Upon information and belief, liquidity will be further strained beyond Week 9 and may result in cash collateral deficits.

Despite the Debtor’s tenuous liquidity position, and the extreme uncertainty caused by the COVID-19 pandemic, the Debtor Proposed Order proposes to pay interest and fees to the Lender and HUD – who are woefully undersecured – in the amount of $700,000 during the period covered by the 9 Week Budget (the ‘Budget Period’). Such payments to the Lender and HUD are thus not only in violation of section 506(b) of the Bankruptcy Code, which prohibits the payment of interest and fees to undersecured lenders, but also directly risks the Debtor’s ability to survive long enough to conclude a sale process – a process by which the Debtor is monetizing the Lender’s and HUD’s collateral for their joint benefit. Even if such payments are ultimately recharacterized as a pay down of the Lender’s and HUD’s secured claim.

There is no reason the Lender and HUD should receive advance payment on account of their undersecured claim when doing so threatens the stability of the entire chapter 11 case. The Debtor Proposed Order includes several other objectionable provisions, including (i) a broad section 506(c) waiver such that the estate can never surcharge the Lender’s collateral, even after the expiration of the Budget Period; (ii) an unreasonable challenge period relating to non-lien causes of action against the Lender and HUD; and (iii) unreasonable case controls regarding post-petition financing and the sale process.”

The Committee has attached a proposed second interim cash collateral order (the “Committee Proposed Order”) to the objection as Exhibit A (with a redline compared to the Debtor Proposed Order attached as Exhibit B), that the Committee said "protects the interests of the Debtor’s estate, its creditors and its patients, while adequately protecting the Lender’s and HUD’s interests in the Collateral to the extent of any diminution in value thereof."

Further Background

On October 19, 2020, the Debtor filed the Cash Collateral Motion [Docket No. 12]. On October 27, 2020, the Court entered an order granting use of cash collateral on an interim basis and scheduling a final hearing on the Cash Collateral Motion for November 17, 2020 [Docket No. 119].

About the Debtors

LRGHealthcare is a not-for-profit healthcare charitable trust operating Lakes Region General Hospital (“LRGH”), Franklin Regional Hospital (“FRH”), and numerous other affiliated medical practices and service programs. LRGH is a community based acute care facility with a licensed bed capacity of 137 beds, and FRH is a 25-bed critical access hospital with an additional 10-bed inpatient psychiatric unit. In 2002, Lakes Region Hospital Association and Franklin Regional Hospital Association merged, with the merged entity renamed LRGHealthcare.

LRGHealthcare employs approximately 1,401 full and part-time employees. In 2019, LRGHealthcare serviced approximately 3,917 inpatient admissions, 33,803 emergency room visits, and approximately 260,000 outpatient visits. The organization has up to 172 licensed beds and the capability to serve patients with various physical and mental health issues. In 2019, LRGHealthcare had net patient revenues of almost $206 million and an operating loss of approximately $20 million.

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