Case 2:18-bk ER Doc 1361 Filed 01/25/19 Entered 01/25/19 15:02:05 Desc Main Document Page 1 of 9 UNITED STATES BANKRUPTCY COURT

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1 Main Document Page of 0 0 PETER J. BENVENUTTI (S.B. NO. 0) JANE KIM (S.B. NO. ) KELLER & BENVENUTTI LLP 0 California Street, Suite 00 San Francisco, California 0 Telephone: () - Facsimile: (0) - pbenvenutti@kellerbenvenutti.com jkim@kellerbenvenutti.com Attorneys for Creditors County of San Mateo And Health Plan of San Mateo In re: UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA LOS ANGELES DIVISION VERITY HEALTH SYSTEM OF CALIFORNIA, INC., et al., Debtors and Debtors in Possession. Affects: X All Debtors Verity Health System of California, Inc. Saint Louise Regional Hospital St. Francis Medical Center St. Vincent Medical Center Seton Medical Center O Connor Hospital Foundation Saint Louise Regional Hospital Foundation St. Francis Medical Center of Lynwood Foundation St. Vincent Foundation St. Vincent Dialysis Center, Inc. Seton Medical Center Foundation Verity Business Services Verity Medical Foundation Verity Holdings, LLC De Paul Ventures, LLC De Paul Ventures - San Jose Dialysis, LLC Debtors and Debtors In Possession. Lead Case No. -bk-0-er Chapter Cases Jointly Administered With: CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-0-er CASE NO.: :-bk-00-er CASE NO.: :-bk-0-er Hon. Ernest M. Robles LIMITED OBJECTION AND RESERVATION OF RIGHTS OF SAN MATEO COUNTY & HEALTH PLAN OF SAN MATEO RE DEBTORS MOTION TO APPROVE FORM OF ASSET PURCHASE AGREEMENT, SALE PROCEDURES, AND OTHER RELIEF Date: February, 0 Time: 0:00 a.m. Place: United States Bankruptcy Court Courtroom East Temple Street Los Angeles, California 00

2 Main Document Page of 0 0 The County of San Mateo and the Health Plan of San Mateo (collectively San Mateo Objectors ), creditors and parties in interest, respectfully submit this Limited Objection and Reservation of Rights ( Limited Objection ) in response to the Debtors Motion for the Entry of (I) an Order () Approving Form of Asset Purchase Agreement for Stalking Horse Bidder and for Prospective Overbidders; () Approving Auction Sale Format, Bidding Procedures and Stalking Horse Bid Protections; () Approving Form of Notice to Be Provided to Interested Parties; () Scheduling a Court Hearing to Consider Approval of the Sale to the Highest Bidder; and () Approving Procedures Related to the Assumption of Certain Executory Contracts and Unexpired Leases; and (II) an Order (A) Authorizing the Sale of Property Free and Clear of All Claims, Liens and Encumbrances; Memorandum of Points and Authorities in Support Thereof, filed January, 0 at Docket No. (the Sale Motion ).. The County of San Mateo ( SM County ) is a governmental entity, a political subdivision of the State of California with a population estimated at approximately 0,000 residents, located immediately south of the City and County of San Francisco. Its governing body is a five-member elected Board of Supervisors. Two of the four Hospitals that are the subject of the Sale Motion are physically located in SM County Seton Hospital, in Daly City, and Seton Coastside, in Moss Beach, which is in unincorporated SM County. With the exception of regulating land use with regard to Seton Coastside, SM County does not have direct regulatory authority over any of the Debtors or their Hospitals.. SM County is also a contingent creditor of Debtor Seton Medical Center ( Seton ). SM County and Seton Hospital are parties to an agreement under which SM County agreed to pay Seton Hospital up to a total of fifteen million dollars during the 0-0, 0-0, and 0-0 fiscal years, provided that Seton Hospital would use these funds to pay for seismic upgrades to meet and maintain compliance with State seismic standards. SM County did, in fact, pay money to Seton Hospital pursuant to the terms of the agreement. The agreement further provides that if Seton Hospital ceases to operate as a nonprofit hospital on or before This and all other capitalized terms used but not defined in this Limited Objection have the definitions given in the Sale Motion or in the Stalking Horse APA which is the subject of the Sale Motion.

3 Main Document Page of 0 0 December, 00, Seton Hospital, or any successor entity, shall be obligated to make grants to SM County for programming or activities benefitting SM County residents in an amount equal to the amount paid by SM County to Seton Hospital under the agreement, less a possible reduction, depending on how long Seton Hospital operates as a nonprofit hospital after receiving the seismic project funds from SM County. SM County may have additional claims against Seton or others of the Debtors.. The Health Plan of San Mateo ( HPSM ) is a local non-profit health care plan that offers health coverage and a provider network to San Mateo County's underinsured population. HPSM operates as a County Organized Health System, a relatively unique health care model under which HPSM is the single entity responsible for administering Medi-Cal benefits for eligible beneficiaries who live in San Mateo County. The governing board for HPSM is the San Mateo Health Commission, a local public agency and political subdivision of the state, created by County ordinance pursuant to state law. The Commission s members are appointed by the San Mateo County Board of Supervisors.. HPSM is also a contingent creditor of Debtor Seton, based on advances totaling $,000 made by HPSM to Seton under an Amendment dated December, 0, to the Medi- Cal Hospital Agreement between HPSM and Seton. The advances were made to fund the development by Seton Hospital of increased skilled nursing capacity. If Seton meets certain performance criteria to HPSM s satisfaction during the period December, 0 through December, 00, the advances will be forgiven. If those criteria are not met during that threeyear period, the evaluation period and applicability of the criteria will be extended for another two years, to December, 0. If, during the initial three-year period, or during the additional two-year period (if it occurs), Seton Hospital ceases to operate as a nonprofit hospital, Seton is obligated to repay the advances in the form of grants for programming or activities benefiting members of HPSM, to the extent of (a) 00% of the amount advanced if the cessation occurs during the initial three-year period, or (b) 0% of the amount advanced if the cessation occurs during the subsequent two-year period. HPSM may have additional claims against Seton or others of the Debtors.

4 Main Document Page of 0 0. Seton Hospital and Seton Coastside provide health care services to meet the needs of many residents of the County of San Mateo. SM County has a statutory duty to provide safety net medical care, that is, medical care to those residing within the county who do not have sufficient resources to obtain subsistence level medical care from a source other than the county. CA Welfare & Institutions Code Section 000, et seq. This mandatory duty gives rise to an interest in and obligation to ensure the provision of medically necessary care, beyond just emergency care, to County residents. See County of San Diego v. State () Cal. th, 0. The San Mateo Health Commission and HPSM, in turn, were established pursuant to Welfare & Institutions Code section 0. in order to address the problems of delivery of publicly assisted medical care in San Mateo County and to promote quality care and cost efficiency. To protect and advance the health, safety and well-being of its residents and to assure the availability to its residents of appropriate health-care services, SM County and HPSM have a governmental interest in the continued operation of Seton Hospital as a full-service acute care hospital with emergency room facilities, and in the continued operation of Seton Coastside as a skilled nursing facility. Neither SM County nor HPSM is a potential buyer of either facility, but both are ready and willing to cooperate with any qualified buyer of either or both facilities that will commit to maintain their health service operations in a manner consistent with SM County s stated objectives. Reservation of Rights. The Notice of the Sale Motion that was given to parties in interests on January, 0, makes clear that the Debtors pending request for Court approval set for hearing on February, 0 is limited to matters relating to the sale process and procedures. These are the matters identified in Part (I) of the title of the Sale Motion, and include approval of the auction sale format, bidding procedures, Stalking Horse Bid Protections, procedures for assumption of executory contracts, scheduling a hearing to consider approval of a sale to the Stalking Horse Purchaser or other winning bidders following an auction, and approval of the form of Stalking Horse APA as a template for potential overbidders to use, with possible modifications, in submitting their bids.

5 Main Document Page of 0 0. The Sale Motion also includes, in addition to the process-related matters identified in Part (I) of its title and summarized in paragraph immediately above, a request for (II) An Order Authorizing the Sale of the Property Free and Clear of All Liens and Encumbrances.... to the winning bidder (or, if there is no Auction, to the Stalking Horse Purchaser). This is the ultimate substantive relief that the Sale Motion seeks, at the culmination of the process to be governed by the procedural matters that are the subject of the hearing on February, after an auction on April or if the condition for an auction are met, at a hearing that the Debtors propose be set on April (the Sale Hearing ).. Based on a fair reading of the Sale Motion and the Notice of Motion, confirmed by direct communication with Debtors counsel, the Limited Objectors are not asserting at this time any objections they may have to approval of a sale to the winning bidder, or to other substantive relief that the Debtors may seek in connection with the proposed April Sale Hearing and that is generally subsumed within Part (II) of the Sale Motion, including but not limited to issues relating to the proposed sale free and clear of liens and encumbrances, the enforceability of the California Attorney General s Conditions, and the scope of and possible limitations on the Court s authority to grant such relief. The Limited Objectors reserve all rights to assert any such objections in connection with the Sale Hearing, in accordance with procedures and deadlines that the Court establishes in a sale procedures order issued as a result of the February hearing. This reservation of rights is also consistent with the procedure followed by the Court in connection with its bifurcated consideration of the proposed sale of facilities located in Santa Clara County (in particular, the Court s conclusion in that prior matter that objections to substantive relief were not ripe for consideration in the context of the sale procedures motion, but should be asserted and considered in connection with the subsequent hearing to substantively approve the sale). Objection to Omission of Schedules. The text of the Stalking Horse APA references numerous schedules and attachments that appear to include many substantive parts of the agreement. The schedules are thus critical to the ability of creditors and other parties in interest in the case, and prospective

6 Main Document Page of 0 0 overbidders, to understand and evaluate the Stalking Horse APA and its impact on them, on the case, and on potential overbids. Only one schedule Schedule.(b)(), entitled Bidding Procedures has been filed or made public to date. The copy of the Stalking Horse APA filed with the Sale Motion includes, in place of the remaining schedules, a single page that states, in full, Schedules.. To.(b) To Be Submitted. Limited Objectors understand, from communication with counsel for the Debtors, that the Debtors intend to file in the relatively near future all of the referenced missing schedules. Limited Objectors object to approval of the Debtors request for Part (I) relief i.e., establishing the procedural framework and schedule for consideration of the proposed sale of assets unless and until all of the missing schedules have been filed. Objection to Restraint on Communications with Governmental Agencies 0. The Stalking Horse APA includes a provision that could be construed to restrict the ability of the Stalking Horse Purchaser to communicate with SM County and/or HPSM on matters of interest to SM County and its residents. Specifically, sec..(b) of the APA provides that the Stalking Horse Purchaser is permitted to meet and communicate with applicable governmental and regulatory authorities regarding prospective compliance with regulatory requirements and related issues but in doing so must obtain approval in advance by Sellers as to timing and content and must provide Sellers with copies of any communications and an opportunity to participate in any meetings. Sec..(b)(ii).. This language, while susceptible of several interpretations, could be construed to mean that the Stalking Horse Purchaser can only communicate with governmental and regulatory authorities (including SM County) about regulatory requirements, and not at least without breaching the APA about other subjects, unrelated to regulatory requirements, that may be of legitimate interest to the buyer and/or SM County. For example, the language could be read to restrict or prohibit communications between the Stalking Horse Purchaser and SM County and/or HPSM concerning the Stalking Horse Purchaser s intended use and future operation of the facilities, reimbursement rates for patients at the facilities, potential or possible modification of the existing Attorney General s Conditions, or coordination of care with San Mateo Medical

7 Main Document Page of 0 0 Center (SMMC) a SM County-owned and operated acute care general hospital and countywide clinic system, among other nonregulatory topics. Or, alternatively, the subject language could be interpreted to restrict only communications related to the subject of compliance with regulatory requirements, with no restrictions or requirements on communications with governmental agencies on other subjects. In addition, the Sellers purportedly have the absolute right to approve in advance the timing and content of any such communication that the Stalking Horse Purchaser wishes to have with governmental agencies (which means the Sellers also have the advance right to prohibit them). The Sellers could also insist on sitting in on any meeting between the Stalking Horse Purchaser and a governmental agency. Are these restrictions limited to communications regarding regulatory requirements and other related issues, or do the Sellers assert that they apply to any communications whatsoever? Does this also mean that the Stalking Horse Purchaser is prohibited from responding to a governmental agency such as SM County should the County initiate the communication, unless the Stalking Horse Purchaser first gets the Sellers approval as to timing and content and the Sellers are invited to join the discussion?. If these provisions are construed in an overly restrictive manner, they could result in an impermissible prior restraint and burden on communications between members of the public and a public entity on matters of public interest, in violation of United States and California Constitutions. U. S. Const. amend. I; CA Const. Art. I, sec. (a).. As applied to the Stalking Horse Purchaser, the Limited Objectors expect the Debtors to assert that the Stalking Horse Purchaser, by negotiating and agreeing to these terms, has knowingly consented to imposition of these restrictions on its rights to communicate with the County and other governmental authorities. But that consent should not be seen purely as a matter of contract, as the restrictions will in effect be adopted and enforced by the Court s order approving the Sale Procedures. Such restrictions would interfere with SM County s legitimate interest in being able to communicate freely with the proposed buyer of established health care facilities, critically important to SM County and its residents, concerning the future of those facilities: the Stalking Horse Purchaser could consider itself precluded from such

8 Main Document Page of 0 communications entirely or without following the stated procedures, or it might assert the restrictions as a justification for not communicating with SM County.. Most significantly, the Stalking Horse Purchaser is not the only party affected by this improper restraint on speech. It is reasonable to anticipate that these prior restrictions and burdens may de facto apply not only to the Stalking Horse Purchaser, but also to all other prospective bidders. These are parties that may be interested in bidding for the Facilities located in SM County, have not [yet] entered a contract with the Sellers, and have issues or concerns about which they wish to communicate with SM County as part of their determination whether to make a bid, but do not wish to get advance permission from the Sellers to approach SM County or advance approval of the content of their communications, and do not wish to have representatives of Seller participate in their communications. Such parties may assess that, because they will be expected to bid on the form of the Stalking Horse APA, they are nevertheless subject implicitly to the same restrictions that apply to the Stalking Horse Purchaser, thereby impeding their ability to communicate freely with SM County in violation of their free speech rights and at the same time undermining the County s ability to perform its proper public functions. Or, even worse, to the detriment of all parties in interest in the case, these restrictions, thus construed, could discourage prospective bidders from participating at all. 0

9 Main Document Page of 0. Accordingly, the Limited Objectors seek appropriate clarification or a modification of the bid procedures to make clear that (a) the Stalking Horse Purchaser is free to initiate communications with SM County and HPSM (and other governmental authorities) about any topic, or at a minimum any topic other than compliance with regulatory requirements, without being subject to the advance approval requirement or other restrictions stated in the Stalking Horse APA, (b) the Stalking Horse Purchaser is free to respond to any communications initiated by SM County or HPSM (or other governmental authorities) on any subject without being required to comply with the restrictions stated in the APA, and (c) that the purported restrictions stated in the APA on the Stalking Horse Purchaser s communications with governmental or regulatory authorities do not apply at all to other prospective bidders or their communications with governmental authorities. 0 Dated: January, 0 KELLER & BENVENUTTI LLP By: /s/ Peter J. Benvenutti Peter J. Benvenutti Attorneys for the County of San Mateo and the Health Plan of San Mateo