In re: Salutarus Dialysis & Nephrology Center

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: August 1, 2012
• Docket: 12-04675
• Status: Unknown

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2

3 IN RE: 4

5 SALUTARIS DIALYSIS & NEPHROLOGY CASE NO. 12-04675 BKT 6 CENTER

7 Chapter 11 8 9 10 XXX-XX2824 11

12 FILED & ENTERED ON 08/01/2012 13

14 Debtor(s) 15 OPINION AND ORDER 16

17 This proceeding is before the Court upon a motion to dismiss filed by Hospital Menonita 18 Caguas, Inc. (“Menonita”) on June 29, 2012 (Dkt No. 17) and the Debtor’s reply to motion to 19 dismiss filed on July 13, 2012 (Dkt No. 25). For the reasons set forth below, Menonita’s request for 20 21 dismissal is hereby GRANTED. 22 I. Background 23 Debtor filed a voluntary petition on June 15, 2012, under the provisions of Chapter 11 of the 24 25 Bankruptcy Code. (Dkt. No. 1). On June 29, 2012, Menonita filed a motion to dismiss, for cause,

pursuant to 11 U.S.C. 1112(b)(1). The motion to dismiss raises two grounds for dismissal: (i) Debtor does not have a legal right to occupy the premises where it is operating, therefore, there is no reasonable likelihood of rehabilitation; and (ii) Debtor does not have a permit or valid license to 1 1 operate its business. 2 A. Relation to Hospital San Juan Bautista bankruptcy proceedings 3 4 Debtor is a domestic corporation that operates a dialysis and nephrology center. On February 5 1, 2009, Debtor and San Juan Bautista Medical Center d/b/a Hospital San Juan Bautista (“Hospital 6 7 San Juan Bautista”) executed a Lease and Operation Agreement (the “Lease Agreement”). The 8 Lease Agreement was to be in effect for five years, commencing on February 1, 2009, and would be 9 subject to renewal for three additional terms consisting of five years each. 10 11 On March 18, 2011, Hospital San Juan Bautista filed a voluntary petition, under the 12 provisions of Chapter 11 of the Bankruptcy Code. (Case No. 11-02270(BKT)). As part of the 13 bankruptcy proceedings in the Hospital San Juan Bautista case, on November 22, 2011, a private 14 15 auction was held for the sale of the rights, titles and interest in the hospital and medical facilities, 16 including, but not limited to, those leases assumed by San Juan Bautista and assigned to the 17 purchaser (the “Sale”) (Case No. 11-02270, Dkt No. 431). The successful bidder and resulting 18 19 purchaser in that case was Menonita (Case No. 11-02270, Dkt No. 444). 20 On December 2, 2011, the Court entered an “Order Authorizing and Approving (I) the Sale of 21 Certain of the Debtor’s Assets Free and Clear of Liens, Claims, Interests and Encumbrances and the 22 23 (II) Assumption and Assignment of Certain Executory Contracts and Unexpired Leases” (Case No. 24 11-02270, Dkt No. 455), referencing the Asset Purchase Agreement (“APA”) executed by Hospital 25 San Juan Bautista and Menonita, and submitted to the Court on December 1, 2011 (Case No. 11-

02270, Dkt No. 448). Pursuant to the APA, Menonita obtained all applicable assets and assigned contracts of Hospital San Juan Bautista, including the right to operate the hospital, free and clear of 2 1 all liens and encumbrances. The APA also provided that Hospital San Juan Bautista would assign to 2 Menonita those executory contracts numbered in the relevant schedules to the APA, and that all 3 remaining executory contracts would be deemed rejected. 4 5 In furtherance of the conditions set forth in the APA, on December 8, 2011, Hospital San 6 Juan Bautista filed a motion to assume and assign to Menonita the executory contracts pertaining to 7 the operation of the hospital, including those related with medical insurance providers and a lease 8 9 agreement (Case No. 11-02270, Dkt No. 462). The Lease Agreement with Debtor was not included 10 among the contracts to be assumed and assigned to Menonita by Hospital San Juan Bautista. The 11 12 motion filed by Hospital San Juan Bautista requesting to assume executory contracts and assign them 13 to Menonita was granted on December 28, 2011 (Case No. 11-02270, Dkt No. 462). However, 14 Hospital San Juan Bautista has not provided evidence of service to Debtor of the motion to assume 15 16 and assign the executory contracts. 17 As a result of the Sale, on November 28, 2011, San Juan Bautista gave notice to Debtor of the 18 termination of the Lease Agreement, effective December 1, 2011 (the “Termination Notice”). 19 20 B. Assignment and transfer of Certificate of Necessity and Convenience, licenses and authorizations from the Puerto Rico Department of Health 21 Hospital San Juan Bautista used to operate and administer the hospital and medical center 22 23 under the Certificate of Necessity and Convenience (“CNC”) No. 99-234 issued by the Puerto Rico 24 Department of Health (“DOH”) on July 28, 19991. On June 23, 2000, the DOH also issued a CNC 25 for Hospital San Juan Bautista to establish a renal dialysis ambulatory center, CNC No. 00-189.

1 The CNC No. 99-234 was issued under the name of San Juan Bautista Medical Center. However, Universidad de Ciencias Médicas San Juan Bautista appears as administrator of the medical center. Notwithstanding, by way of a corporate resolution issued by the board of trustees of Escuela de Medicina San Juan Bautista on December 1, 2011, the school of medicine recognized, adopted and ratified the terms and conditions of the APA, including the authorization and transfer of all applicable CNCs and licenses issued by the DOH to Menonita. 3 1 Upon execution of the Lease Agreement, on March 4, 2009, the DOH cancelled CNC No. 00-189 2 and issued CNC No. 09-052 to Debtor, as lessee, to continue operating the renal and dialysis center. 3 Debtor’s CNC was amended and reissued under CNC No. 11-177 on November 8, 20112. 4 5 The DOH had also issued a license for Debtor3 to operate as a dialysis ambulatory center 6 under CNC No. 09-052, License No. 17 issued on February 24, 2010, effective until February 21, 7 2012. Upon the expiration of this license, the DOH certified on March 14, 2012 that Debtor filed all 8 9 documents needed for the issuance or renewal of the license on March 10, 2012. The DOH then 10 assigned February 21, 2014, as the new expiration date for Debtor’s license. 11 12 The sale of assets to Menonita was conditioned on the execution of a new lease agreement 13 between Menonita and the DOH. Consistent with the terms of the APA, the assignment and transfer 14 of all the pertinent assets of San Juan Bautista to Menonita, and the operation of the hospital and 15 16 medical center, also included the issuance of new CNCs and licenses on behalf of Menonita. 17 Consequently, on November 29, 2011, the DOH issued a new license for Menonita to operate and 18 administer the hospital and medical center, License No. 7, issued under CNC No. 11-187. On 19 20 December 2, 2011, the DOH issued the new CNC No. 11-187, for the operation and administration 21 of the hospital and medical center. CNC No. 11-187 expressly includes the operation and 22 administration of the renal dialysis ambulatory center. 23 24 II. Applicable law and analysis 25

2 CNCs No. 09-052 & No. 11-177 named Universidad de Ciencias Médicas San Juan Bautista, Inc. as the owner of the medical facilities. By way of a corporate resolution issued by the board of trustees of Escuela de Medicina San Juan Bautista on December 1, 2011, the school of medicine recognized, adopted and ratified the terms and conditions of the APA, including the authorization and transfer of all applicable CNCs and licenses issued by the DOH to Menonita.

3 The license issued by the DOH on February 24, 2010, appears under the name of Caguas Dialysis and Nephrology Center. However, Debtor discloses in its voluntary petition that Salutaris Dialisys & Nephrology Center has also been known as Caguas Dialysis. 4 1 A. Dismissal Standard 2 Section 1112(b) of the Bankruptcy Code provides for the dismissal or conversion of a chapter 3 11 case upon a finding of cause. Section 1112(b)(1) provides that: 4 5 “...on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under 6 this chapter, whichever is in the best interests of creditors and the estate, for cause...” 7 11 U.S.C. §1112(b)(1)

8 Under this section, dismissal is mandatory upon a showing of cause. In re Sanchez, 429 B.R. 9 10 393, 399 (Bankr.D.P.R. 2010). Section 1112 does not define the term “cause”, rather, the section 11 simply enumerates examples of cause, any one of which may be sufficient to justify the conversion 12 or dismissal of the case. In re Sanchez, 429 B.R. at 399-400. The term ‘cause’ includes “substantial 13 14 or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of 15 rehabilitation”. 11 U.S.C. § 1112(b)(4)(A). 16 B. Licensing requirements 17 18 Under Puerto Rico Law, no person may establish, operate or maintain in the Commonwealth 19 of Puerto Rico a health facility without a license. 24 L.P.R.A. § 333d. For purposes of this section 20 the term ‘person’ has been construed as an individual, firm, partnership, corporation, company, 21 22 association or joint stock association, and the legal successors thereof. 24 L.P.R.A. § 331a. 23 Likewise, Act No. 2 of November 7, 1975, as amended, (the “Certificate of Necessity and 24 Convenience Law” or the “Act”), 24 L.P.R.A. §§ 334 et seq., and the DOH regulations provide the 25 process for requesting and issuing CNCs. Particularly, Section 334a provides that: “No person may acquire or construct a health facility or offer or develop a new health service, or make capital investments for or in favor of a health facility, or acquire 5 1 highly-specialized medical equipment without having first obtained a certificate of necessity and convenience granted by the Secretary [of the DOH].” 2 24 L.P.R.A. § 334a 3 A CNC is issued by the DOH and authorizes a person to carry out any of the activities 4 5 covered by the Act. It certifies that the activities are necessary for the population it is to serve and 6 that it will not unduly affect the existing services. Thereby contributing to the orderly and adequate 7 development of health services in Puerto Rico. Walgreen Co. v. Rullan, 405 F.3d 50, 52 (1st Cir. 8 9 2005). The Act identifies the health facilities required to obtain a certificate, provides criteria for 10 granting a certificate, allows the Secretary of the DOH to promulgate additional certificate criteria, 11 12 and establishes administrative and judicial review procedures governing the certificate review 13 process. Walgreen Co. v. Rullan, 405 F.3d at 52-53. 14 III. Conclusion 15 16 The record of the case shows that the Lease Agreement between Debtor and Hospital San 17 Juan Bautista was never assumed by the latter in the bankruptcy case of Hospital San Juan Bautista 18 19 and was never assigned to Menonita as part of those proceedings. Contrariwise, San Juan Bautista’s 20 actions intended the rejection of the Lease Agreement. However, due to the lack of adequate notice 21 and service to Debtor of the motion to assume and assign the executory contracts, the Court cannot 22 23 enforce such remedy upon Debtor. 24 Notwithstanding, the Court is aware that Debtor was duly notified of the termination of the 25 Lease Agreement by Hospital San Juan Bautista contemporary with the sale of all assets and interest

of the hospital and medical facilities to Menonita. The Termination Notice was valid and enforceable. 6 1 Moreover, The CNC No. 11-187 issued by the DOH in favor of Menonita specifically 2 contains the operation and administration of the renal dialysis ambulatory center formerly leased by 3 Hospital San Juan Bautista to Debtor. This Court is of the opinion that both, the CNC No. 11-187 4 5 and License No. 7 granted by the DOH to Menonita revoke and supersede the CNC No. 99-234 by 6 which Hopital San Juan Bautista was authorized to operate and administer the hospital and medical 7 center, as well as CNC No. 09-052 & 11-177, which authorized Debtor to operate the dialysis 8 9 ambulatory center. As such, Debtor’s CNC No. 09-052 & 11-177, as well as License No. 17 were 10 rescinded. Debtor has not proven otherwise. Therefore, the Court finds that Debtor is, thus, 11 12 operating without a valid CNC and/or License. 13 The fact that the Lease Agreement was terminated by Hospital San Juan Bautista and no new 14 lease agreement is in place with the new administrator, Menonita, means that Debtor can no longer 15 16 operate its business on those premises. This results in a substantial loss or diminution of the estate. 17 11 U.S.C. §1112(b)(4)(A). Also, the fact that Debtor’s CNC and license were revoked complements 18 that conclusion. Thus, reorganization is unlikely in this case. Accordingly, the Court finds no 19 20 reasonable likelihood of rehabilitation. 21 The fact that Debtor’s assets comprise mainly the Lease Agreement for the operation of the 22 dialysis ambulatory service, which is no longer in effect, there would be no assets to liquidate or 23 24 administer in a potential Chapter 7 case. Thus it appears that dismissal and not conversion is in the 25 best interest of the creditors and the estate.

WHEREFORE, IT IS ORDERED that Menonita’s motion to dismiss shall be, and it hereby is, GRANTED. 7 1 It is further ORDERED that the Clerk shall dismiss and close any contested matter o adversary proceeding related to the instant case.

4 IT IS SO ORDERED. 5 San Juan, Puerto Rico this 01 day of August, 2012. 6 BD

9 U.S. Bankruptcy Judge 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25