HEALTHCARE BANKRUPTCY (FAQ)

WHAT IS BANKRUPTCY?
When a business runs out of cash or incurs an unusual liability, bankruptcy gives it a legal safe harbor to let it reorganize. Bankruptcy is a legal strategy that provides relief from creditors while a business entity deals with a liquidity crisis or recapitalizes to reduce leverage. Bankruptcy law governs a wide range of activities including business liquidation, but it should not be viewed solely as a means of liquidating a failed business. More often, it is used as a tool to reorganize or restructure a business to once again operate profitably. In all cases, bankruptcy law attempts to protect the rights of both the debtor and its creditors.

IF A HEALTHCARE PROVIDER IS IN BANKRUPTCY, DOES THAT NECESSARILY MEAN IT IS NOT CREDITWORTHY?
No. Any business in a Chapter 11 bankruptcy proceeding is frequently considered a more creditworthy borrower due to the supervision and protection implicit in a Bankruptcy Court proceeding. Bankruptcy proceedings may occur for many reasons, including: (1) poor capital structure, (2) poor operating results, (3) inability to fully access liquidity and cash flow, (4) pending litigation, and (5) unfavorable contracts or leases.

There are as many reasons as there are business entities that go into bankruptcy. In bankruptcy, pre-petition creditors are prevented from taking action against the debtor. While secured creditors are entitled to adequate protection, unsecured or under-secured creditors are blocked from receiving any payments during the case. An asset-based lender providing Debtor-In-Possession (DIP) financing following the filing of either a voluntary or involuntary bankruptcy proceeding utilizes the same fundamental asset valuation approach to provide the loan as it would utilize for a company not in bankruptcy. The availability of DIP financing may depend on the perceived viability of the specific HealthCare Provider during the proceeding and on its ability to successfully complete a Plan of Reorganization (POR) or Section 363 asset sale (these terms are defined in the Glossary). The availability of capital-and access to it is the foundation of a HealthCare Provider’s ability to operate in bankruptcy. It is absolutely critical that any HealthCare Provider considering a Chapter 11 proceeding contact a prospective lender to determine the availability of DIP financing prior to initiating a proceeding. In most cases, DIP loans are arranged for prior to or in conjunction with the actual petition date.

For a specific discussion regarding specific requirements with respect to bankruptcy, contact AMR to discuss a restructuring program and if required, we will assist you in retaining an attorney specializing in bankruptcy that is also familiar with the HealthCare Industry, if necessary.

WHY WOULD A HEALTHCARE PROVIDER CONSIDER FILING BANKRUPTCY?
There are many reasons HealthCare Providers file bankruptcy petitions, but the four most common are:
  1. The business is experiencing continuing operating losses;
  2. The business has leases or executory contracts that contribute to continuing operating losses and files in order to terminate the leases or contracts;
  3. The business is experiencing liquidity problems resulting from a lack of cash or from the inability to refinance, on acceptable terms, long-term debt obligations coming due; and
  4. The business has significant long-term obligations which have emerged from liability claims or extraordinary judgments.

ARE THERE DIFFERENT KINDS OF BANKRUPTCY FILINGS?
Yes. A business experiencing continuing operating losses, liquidity problems, or long-term obligations would generally file for protection under Chapter 11 of the Federal Bankruptcy Code while it reorganizes and gets back on its feet. A business that expects to go out of business might file bankruptcy under Chapter 7 to provide for an orderly liquidation of its assets. Municipalities file under Chapter 9, family farmers under Chapter 12, and individuals under Chapter 7 or 13.

WHO DECIDES WHETHER A HEALTHCARE PROVIDER FILES BANKRUPTCY?
A bankruptcy filing can be either voluntary or involuntary. The difference is essentially whether the business entity elects to file a bankruptcy petition (voluntary) or some other individual or entity files a petition to force the business into bankruptcy (involuntary). Filing voluntarily lets the HealthCare Providers choose where the legal proceedings take place and can provide the business with more control over its situation. If its creditors force a HealthCare Provider into bankruptcy, the creditors could choose to start legal proceedings in a location that may not be convenient to the business. That could require a special trip to court for the business executives to request a more convenient location, which may or may not be granted. Always remember that creditors have rights; a business cannot be cavalier in deciding not to pay its creditors. A debtor will rarely be offered refuge under bankruptcy law when the debtor can pay debts rightfully owed without undue hardship.

DOES A HEALTHCARE PROVIDER HAVE TO BE INSOLVENT TO DECLARE BANKRUPTCY?
A business is usually considered to be insolvent when it is unable to meet its debts as they come due, has too little capital to operate properly, or has debts that exceed the value of its assets. A business usually faces one of these conditions when it is considering bankruptcy; however, a debtor does not have to be insolvent to file bankruptcy.

IS IT POSSIBLE TO BORROW MONEY IN BANKRUPTCY?
Yes, with bankruptcy court approval. A Debtor-In-Possession (DIP) may obtain unsecured financing that has priority over all unsecured claims. If a DIP is not able to obtain unsecured financing, it can seek approval for a secured loan.

WHO CAN PROVIDE A DIP LOAN?
It is critical that a lender providing a DIP loan have specialized experience in both asset based lending and bankruptcy financing because a DIP loan requires the approval of the Bankruptcy Court and usually involves a pledge of collateral. A HealthCare Provider in bankruptcy cannot properly borrow substantial sums without Court approval. And, DIP financing is one of the business offering of AMERICAN MEDICAL REVENUE. Remember, our Mission Statement: SAVING INSTITUTIONS THAT SAVE LIVES?.

DOES YOUR CURRENT LENDER HAVE TO PROVIDE YOUR DIP LOAN?
No. In fact, you may have difficulty getting your current lender to provide a loan if it has developed "lender's fatigue"-the industry term used to describe a lender's unwillingness to continue a troubled lending relationship. It is often possible to get a DIP loan from a new lender provided that the DIP has unencumbered assets to secure the DIP loan or is able to grant a "priming lien" on encumbered assets by providing "adequate protection" of the interest of the existing lender holding a lien on such assets. A creditor's interest may be adequately protected when its collateral is valued sufficiently in excess of the obligations owing to it.

WHAT IS A PLAN OF REORGANIZATION?
A plan of reorganization (“POR”) is the document that outlines the Chapter 11 exit strategy of the DIP. It sets forth the new capital structure of the DIP and the treatment of the various classes of creditors and equity holders. The POR must be confirmed by the bankruptcy court before it can become effective. The DIP has the exclusive right to propose a plan within the first 120 days of the Chapter 11 case, which is subject to extension by the Court. A DIP usually tries to negotiate a consensual POR with its major creditors. Each class of creditors will be entitled to vote on a POR. If it meets all the requirements of the bankruptcy code, a POR will be approved if each class of the DIP's creditors and equity holders (generally a 2/3 majority) accepts it. A POR may be "crammed down" and confirmed over the objections of a class of creditors or equity holders if it does not discriminate unfairly and is fair and equitable (conforms to the "absolute priority rule"). Once confirmed, the plan is binding. Specialized financing is often an integral part of a POR and may be critical to a company's successful emergence from bankruptcy.

HOW IMPORTANT IS SELECTING THE RIGHT LEGAL REPRESENTATION FOR BANKRUPTCY?
Vitally important! Seek out competent, specialized counsel before filing bankruptcy. Bankruptcy is a very highly specialized and technical branch of the law, and an experienced practitioner can greatly smooth any business’ path through the process. An attorney who sits on your board or your internal counsel is probably not the right person to represent you, but he or she may be able to help you locate and evaluate law firms that practice bankruptcy law. Or, you can contact AMR and we will assist you in locating and evaluating law firms in your immediate area that will best suit your overall bankruptcy requirements.

HOW DOES FILING BANKRUPTCY MAKE REORGANIZATION POSSIBLE?
Filing a bankruptcy petition gives you time to work out a plan to reorganize the business. When you file a bankruptcy petition, you can often stop paying your pre-petition creditors, but you still will need cash flow to continue operating in bankruptcy. Cash enables you to pay employees and post-petition trade creditors while you reorganize the business to emerge with a plan for a fundamentally profitable business. You could generate cash from operations while in bankruptcy. You could borrow it provided you can obtain DIP financing. In some circumstances you could raise cash by selling assets. How you create cash flow will depend on your situation, but you must have it to make bankruptcy successful.

IF A PRE-PETITION LOAN IS PAID OFF USING BANKRUPTCY FINANCING, IS THE DEBTOR LIABLE FOR THE PREPAYMENT PENALTY?
Filing bankruptcy is a default under a business entity’s loan agreements, which generally means the loan immediately comes due. To determine whether or not a prepayment penalty must be paid, seek advice of competent bankruptcy counsel to review your loan agreement and to advise you as to the practice in your Bankruptcy Court. Regardless, under such circumstances a business entity considering bankruptcy should carefully weigh the decision of which lender to bring in for bankruptcy financing.

WHAT HAPPENS TO A NEGATIVE PLEDGE AGREEMENT IF A BUSINESS ENTITY FILES BANKRUPTCY?
A business entity that has an unsecured working capital line may have made a negative pledge agreement whereby it promises not to secure certain assets such as inventory or receivables to any other lenders. However, once the business entity files bankruptcy it is protected from lawsuits brought by its prior creditors, so a negative pledge would no longer be enforceable by a pre-petition lender. In securing bankruptcy financing, a business can generally secure whatever assets are unencumbered.

IF A LENDER WILL GIVE A BUSINESS FINANCING GOING INTO BANKRUPTCY, DOES THAT MEAN IT WILL GUARANTEE TO PROVIDE FINANCING TO EMERGE FROM BANKRUPTCY?
No. Expect a lender to make two separate credit evaluations. One to finance the business on entering bankruptcy and another to finance it as it emerges.

WHAT IS A PREFERENCE PAYMENT?
A preference payment is a payment or transfer of property (including the transfer of a security interest) not in the ordinary course of business to or for the benefit of a creditor made within 90 days (or one year in the case of a creditor who is an insider) of bankruptcy on account of antecedent debt. Payments to a fully secured creditor are not preferential because a transfer is only a preference if it allows a creditor to receive more than it would receive in Chapter 7 liquidation. The preference rules are designed to prevent a race by creditors to seize a debtor's assets on the eve of bankruptcy and to ensure an equitable distribution of the debtor's assets. A DIP or trustee may seek the return of preferential transfers for the benefit of all of the estate's creditors.

HOW CAN A BUSINESS PAY LENDERS OR LAWYERS TO PERFORM DUE DILIGENCE IF IT IS IN DIRE STRAITS?
It is possible to pay for these costs out of the money that is available in the ordinary course of business prior to filing. Once a business files bankruptcy, however, it cannot pay attorney fees or lender fees without court approval.

WHAT COSTS ARE INVOLVED IN BANKRUPTCY?
Bankruptcy is expensive. There are significant costs which may include legal fees or retainers, the expenses of Court-appointed committees and professionals, Court fees, a lender's due diligence and loan fees, investment bank fees if new stock is issued, and development of a plan to emerge from bankruptcy. While circumstances may allow trade suppliers to continue shipping goods once bankruptcy is filed, some customers/patients may turn to a competitor who is not in bankruptcy. In addition to out-of-pocket expenses, management must also weigh the impact bankruptcy will have on its business operations. The process disrupts the normal conduct of business. Opportunity costs, which may be difficult to measure, are very much an element of bankruptcy.

WHAT ARE "PREPACKAGED" BANKRUPTCY AND "PREARRANGED" BANKRUPTCY?
Both involve planning the POR before filing. In a prepackaged bankruptcy, the business entity, lenders, and the trade usually have formally agreed to the deal in advance. In a prearranged bankruptcy, the business entity works out details up front but has not had or concluded formal discussions with lenders and has less assurance the trade suppliers or trade creditors and other lenders will go along.
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