In re Adpt DFW Holdings, LLC

574 B.R. 87

IN RE: ADPT DFW HOLDINGS, LLC, et al.,¹ Debtors.

CASE NO. 17–31432–SGJ–11

Jointly Administered Under Case No. 17–31432–SGJ–11

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Signed September 29, 2017

Elizabeth Nicolle Boydston, Theodore W. Daniel, Scott P. Drake, Kristian W. Gluck, John N. Schwartz, Timothy S. Springer, Louis R. Strubeck, Jr., Gregory Michael Wilkes, Norton Rose Fulbright US LLP, Dallas, TX, Jennine Y. Hovell–Cox, Law Offices of Jennine Hovell–Cox, Sugar Land, TX, Thomas R. Califano, DLA Piper LLP (US), New York, NY, for Debtor.

MEMORANDUM OPINION REGARDING SUBSTANTIVE CONSOLIDATION

Stacey G.C. Jernigan, United States Bankruptcy Judge

On September 26–27, 2017, this court held a hearing to consider confirmation of the above-referenced Chapter 11 Debtors' Third Amended Joint Plan of Reorganization, as modified by certain Plan Supplements and modifications in the record (the "Plan"). After hearing numerous witnesses and considering hundreds of documents submitted into evidence, the court decided to confirm the Plan. Separate Findings of Fact, Conclusions of Law, and an Order Confirming Plan are being issued separately by the court. This Memorandum Opinion pertains solely to the substantive consolidation proposed in the Plan, to which an objection was lodged and overruled. This Memorandum Opinion is issued pursuant to Fed. Rs. Bankr. Proc. 7052 and 9014 in support of the court's ruling that the substantive consolidation proposed in the Debtors' Plan was legally proper.

I. Introduction.

The above-referenced Debtors (the "Debtors" or "Adeptus"—as the Debtors are collectively known), together with certain non-debtor affiliates, constitute the oldest and largest network of freestanding emergency rooms ("FSERs") in the United States. The Debtors are headquartered in Lewisville, Texas. Since the Debtors' founding in the year 2002, the Debtors have described themselves as being a patient-centered healthcare organization dedicated to providing quality emergency care through its FSERs, which are open to the public 24 hours a day, seven days a week. As of April 19, 2017 (the "Petition Date"), the Debtors' business operations consisted of five fully-operational hospitals and 99 FSERs, that are either wholly-owned by the Debtors or by the Debtors' joint ventures with leading healthcare systems in Arizona, Colorado, and Texas. There are 140 Debtors in this jointly-administered case. In the year 2017 to date, approximately 400,000 patients have visited facilities within the Adeptus network. Approximately 3,800 physicians, nurses, radiology technicians, laboratory professionals, and other administrative staff are either employed by or are independent contractors with the Adeptus organization. At the top of the Adeptus organizational structure is a public company called Adeptus Health Inc. ("PubCo"), which was incorporated in the year 2014 and conducted an initial public offering and subsequent offerings. Next in the organizational structure is Adeptus Health LLC (the holding company for the organization before PubCo was created to take the enterprise public). Next in the organizational structure is First Choice ER, LLC—the original company created when the first FSER was opened. Then, lower in the organizational structure are the various companies that own, manage, or perform other functions with regard to the various health care locations.

As far as the Debtors' capital structure, the Debtors' creditors in these cases consisted of the holders of secured debt (the "Deerfield Parties") on a Prepetition Credit Agreement (herein so called), on which more than $228 million was due and owing as of the Petition Date, and with regard to which 80 of the 140 Debtors were obligated. Postpetition, the Deerfield Parties extended secured debtor-in-possession financing of more than $70 million, and all 140 Debtors were obligated on it. The Debtors also have collectively perhaps $20–$50 million in unsecured trade debt—although the exact number is not yet known and could be higher. The Debtors also have medical malpractice claims (which there should be insurance to fully cover) and subordinated debt—most of which is held by insiders, but some of which is asserted by former shareholders of PubCo in certain contested securities litigation that is not very far along (the "Section 510(b) Claims"). The Debtors also have preferred shareholders (many of whom are defendants in litigation). And finally, the Debtor PubCo has a large number of public shareholders.

The Debtors' Plan proposes that the Deerfield Parties will exchange their secured debt for all of the equity of the reorganized Debtors. The Debtors' business enterprise was valued by the financial advisory firm Houlihan Lokey at between $115 million and $137 million (no party contested this valuation). The Deerfield Parties' unsecured deficiency claim was valued at $191.8 million (uncontested) and this unsecured deficiency claim and all other claims of the 140 Debtors will be pooled and shared in a Litigation Trust (herein so called), that will receive initial funding of $3 million cash and will likely receive another $3 million dollars of debt financing. The Litigation Trust will receive all of the Debtors-estates' causes of action (of which there are many)—especially against former insiders—as well as certain "contingentvalue rights" (i.e., cash flow in the future if the reorganized Debtors perform at certain levels in the future).

As noted, the Plan contemplates substantive consolidation of all 140 Debtors for Plan treatment and voting purposes. The following classes exist under the Plan:

 Class Type of Claim or Interest Impairment Entitled to Vote
Class 1   Priority Non-Tax Claims                 Unimpaired   No (Deemed to accept)
Class 2   Other Secured Claims                    Unimpaired   No (Deemed to accept)
Class 3   Deerfield Secured Claims                Impaired     Yes
Class 4   Medical Malpractice Claims              Impaired     Yes
Class 5   General Unsecured Claims                Impaired     Yes
Class 6   Convenience Class Claims                Impaired     Yes
Class 7   Subordinated Claims —                   Impaired     Yes
             Subclass 7(a) — TRA Claims
             Subclass 7(b) — Other Subordinated
                Claims
Class 8   Existing Preferred Equity Interests     Impaired     Yes
Class 9   Existing Common Equity Interests        Impaired     Yes

A large but disputed unsecured creditor ("PST"), with an alleged claim of about $5 million, has objected to the substantive consolidation. PST formerly collected the Debtors' medical accounts receivable (for about a two-year period). The Debtors have argued that PST did a poor job and the Debtors have terminated PST's contract. The Debtors have indicated that they have their own claims against PST and they intend to bring litigation against PST.

II. The Substantive Consolidation Provisions of the Plan.

Both Article 3.2 and 5.1 of the Plan contain a "Substantive Consolidation" provision. Specifically, these provisions provide that:

Except as otherwise provided in this Plan, each Debtor shall continue to maintain its separate corporate existence after the Effective Date for all purposes other than the treatment of Claims under this Plan. Except as expressly provided in this Plan (or as otherwise ordered by the Bankruptcy Court), on the Effective Date: (a) all assets (and all proceeds thereof) and liabilities of the Debtors shall be deemed merged or treated as though they were merged into and with the assets and liabilities of each other, (b) no distributions shall be made under this Plan on account of Intercompany Claims among the Debtors and all such Claims shall be eliminated and extinguished, (c) all guaranties of the Debtors of the obligations of any other Debtor shall be deemed eliminated and extinguished so that any Claim against any Debtor, and any guarantee thereof executed by any Debtor and any joint or several liability of any of the Debtors shall be deemed to be one obligation of the consolidated Debtors, (d) each and every Claim filed or to be filed in any of the Chapter 11 Cases shall be treated filed against the consolidated Debtors and shall be treated one Claim against and obligation of the consolidated Debtors, and (e) for purposes of determining the availability of the right of set off under section 553 of the Bankruptcy Code, the Debtors shall be treated as one entity so that, subject to the other provisions of section 553 of the Bankruptcy Code, debts due to any of the Debtors may be set off against the debts of any of the other Debtors. Such substantive consolidation shall not (other than for purposes relating to this Plan) affect the legal and corporate structures of the Reorganized Debtors. Moreover, such substantive consolidation shall not affect any subordination provisions set forth in any agreement relating to any Claim or Interest or the ability of the Reorganized Debtors or the Litigation Trust Trustee, as applicable, to seek to have any Claim or Interest subordinated in accordance with any contractual rights or equitable principles. Notwithstanding anything in this section to the contrary, all post-Effective Date fees payable to the United States Trustee pursuant to 28 U.S.C. § 1930, if any, shall be calculated on a separate legal entity basis for each Reorganized Debtor.

The Debtors and others in the case have described this substantive consolidation as "deemed" substantive consolidation or substantive consolidation "light." Why? Because it is substantive consolidation that is being implemented for plan-purposes only (i.e., voting and treatment purposes). Post-reorganization, the reorganized Debtors may or may not keep their existing structure of 140 separate legal entities.

III. The Law of Substantive Consolidation.

As a general matter, substantive consolidation in a bankruptcy case results in the combination of two or more debtors into a single pool...