Introduction
On May 6 and 7, 2019 (the “Petition Date”), Hospital Acquisition LLC and its related entities Hospital Acquisition Intermediate Sub LLC, LifeCare Holdings LLC, LifeCare Behavioral Health Hospital of Pittsburgh LLC, New LifeCare Hospitals LLC, New LifeCare of Hospitals of Dayton LLC, New LifeCare Hospitals of Milwaukee LLC, New LifeCare Hospitals of South Texas LLC, Hospital Acquisition Sub II LLC, New LifeCare Management Services LLC, New LifeCare REIT 1 LLC, New LifeCare Hospitals of Mechanicsburg LLC, New Pittsburgh Specialty Hospital LLC, LifeCare Vascular Services, LLC, New LifeCare Hospitals of North Texas LLC, New LifeCare Hospitals of Chester County LLC, New LifeCare Hospitals of Northern Nevada LLC, New San Antonio Specialty Hospital LLC, New LifeCare Hospitals of North Carolina LLC, New LifeCare Hospitals of Pittsburgh LLC, New NextCare Specialty Hospital of Denver LLC, Hospital Acquisition MI LLC, LifeCare Pharmacy Services LLC, New LifeCare REIT 2 LLC, New LifeCare Hospitals at Tenaya LLC, and New LifeCare Hospitals of Sarasota LLC (collectively the “Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware.
The Debtors are represented by Akin Gump Strauss Hauer & Feld LLP as lead counsel and Young Conaway Stargatt & Taylor, LLP as local counsel. The cases have been assigned to the Honorable Brendan Linehan Shannon. A hearing on the Debtors’ first day motions was held on May 8, 2019. The meeting to form an official committee of unsecured creditors is scheduled for May 17, 2019, at 10:00 a.m. (ET).
Background
Headquartered in Plano, Texas the Debtors are a leading operator of long-term acute care hospitals (“LTAC”) in the United States. In addition to the LTAC facilities, certain non-debtor affiliates own and operate home health care agencies (“Home Healthcare”) with locations in Texas, Florida and Nevada. The Home Healthcare agencies and the Debtors’ hospital facilities are operated completely independent of each other and the Debtors do not currently anticipate that the Home Healthcare facilities will seek chapter 11 protection. Through its operating subsidiaries, the Debtors provide a full range of clinical hospitalization. Substantially all of the Debtors’ revenue derives from the provision of patient services and is received through Medicare and Medicaid reimbursement and payments from private payors. As of the Petition Date, the Debtors operated seventeen facilities in nine states. The Debtors employ approximately 3,500 people, all but approximately 150 of whom are employed at the hospital level.
In 2012, LCI Holdings found themselves capital constrained. In an effort to address their liquidity concerns, on December 11, 2012, LCI Holdings filed chapter 11 petitions with the Delaware Bankruptcy Court. Through their bankruptcy proceeding, LCI Holdings effectuated a sale of substantially all of its assets to the Debtors. The bankruptcy case was closed on October 28, 2016.
Debtors’ Financial Condition
As of the Petition Date, the Debtors’ total consolidated long-term debt obligations were approximately $185 million, consisting of, among other things, institutional loans and secured notes. In August 2018, LifeCare Holdings (“LifeCare”) (a) refinanced an existing revolving facility with a $40 million revolving facility by entering into a credit agreement by and among LifeCare and White Oak Healthcare Finance, LLC (the “Prepetition Revolving Lenders”), (b) entered into a priming term loan credit agreement by and among LifeCare, debtor Hospital Acquisition Intermediate Sub LLC and Glas Trust Company LLC (the “Prepetition Priming Term Loan Agent”) pursuant to which LifeCare borrowed $7.5 million and provided a term loan commitment of an additional $7.5 million and (c) amended their then-existing term loan credit facility under a credit agreement among LifeCare, HAI Sub, Seaport Loan Products LLC (the “Prepetition Term Loan Administrative Agent”) and Wilmington Trust National Association (the “Prepetition Term Loan Collateral Agent”) (the “August 2018 Transactions”). Prior to August 2018, LifeCare Holdings and the other Debtors were parties to a $20 million revolving credit facility which matured by its terms in May 2018. Pursuant to the August 2018 Transactions, LifeCare refinanced the debt under each revolving credit facility with the prepetition credit agreement. As of the Petition Date, there was approximately $23.9 million outstanding under the prepetition revolving credit agreement, plus issued but undrawn letters of credit of approximately $9.4 million. These obligations are secured by substantially all of the Debtors’ assets. In connection with the August 2018 Transactions, LifeCare entered into a prepetition priming term loan credit agreement governing a $15 million secured term loan credit facility consisting of (a) an initial $7.5 million term loan at closing and (b) a commitment to borrow an additional $7.5 million of term loans after closing. As of the Petition Date, there was approximately $7.7 million outstanding under the prepetition priming term loan credit agreement. This obligation is secured by substantially all of the Debtors’ assets. Pursuant to the August 2018 Transactions, LifeCare amended the prepetition term loan credit agreement in order to, among other things, extend the maturity date to November 2021, reduce the cash interest payment and amend the financial covenants under the prepetition second term facility agreement. As of the Petition Date, there was approximately $136.8 million outstanding under the prepetition term loan credit agreement. This obligation is secured by substantially all of the Debtors’ assets.
DIP and Cash Collateral Motion
The Debtors are seeking interim and final authorization to obtain senior secured, post-petition financing on a super priority basis consisting of a senior secured super-priority revolving credit facility (the “DIP Facility”) by and among certain of the Debtors as borrowers, Hospital Acquisition LLC and Hospital Acquisition Intermediate Sub LLC, as guarantors, and White Oak Healthcare Finance, LLC as the DIP lender. The DIP Facility will provide a revolving credit facility in an aggregate principal amount of up to approximately $57.7 million (including $15 million of incremental liquidity). On an interim basis, the Debtors will be authorized to borrow under the DIP Facility, in an aggregate outstanding principal amount so that the outstanding balance of the DIP Facility (after taking into account the repayment of the existing debt as authorized by the interim order, but without regard to the issue and outstanding letter of credit obligations) shall not exceed $27 million. The DIP Facility will be used by the Debtors to fund operating expenses, working capital and other general corporate purposes, fund the costs and expenses of administering the chapter 11 cases and assume the existing debt.
An interim order approving the Debtors’ use of DIP was entered on May 8, 2019. A final hearing on the motion is scheduled for May 29, 2019, at 11:00 a.m. (ET).
Other Significant First Day Motions
Confidentiality of Patient Information Motion
The Debtors are seeking authorization to establish certain procedures to maintain the confidentiality of patient information as required by HIPAA. Through the motion, the Debtors request authorization to omit any reference to current or former patients from the creditors matrix and any certificate of service, reference current and former patients by a code number on the Debtors’ schedules and statement of financial affairs, and maintain a list of all current and former patients and make the list only available to the Bankruptcy Court, the United States Trustee, counsel to the DIP lender and any statutory committee appointed in these cases, only after entry of a mutually acceptable non-disclosure agreement.
An order approving the Debtors’ motion was entered on May 8, 2019.
Insurance Motion
The Debtors are seeking authority to maintain existing insurance policies and pay all obligations and to renew, revise, extend, supplement, change, or enter into new insurance policies as needed. The Debtors are also seeking authority to pay any amounts due to brokers and agents engaged by the Debtors, in the ordinary course of business and pay prepetition obligations. As of the Petition Date, the Debtors believe that approximately $90,000 in premiums are due and owing and will be paid within the first twenty-one days of these cases.
An order approving the Debtors’ motion was entered on May 8, 2019.
Taxes Motion
The Debtors are seeking authority to pay certain prepetition taxes and fees that, in the ordinary course of business, accrued or arose before the Petition Date. The Debtors wish to continue to pay the appropriate authorities in the ordinary course of business. In addition, the Debtors are seeking authority, on a final basis, to pay and remit taxes and assessments in the ordinary course of business. Through the motion, the Debtors are only seeking authority to pay prepetition taxes up to $500,000 during the first twenty-one days of the bankruptcy proceeding.
An interim order approving the Debtors’ motion was entered on May 8, 2019. A final hearing on the motion is scheduled for May 29, 2019, at 11:00 a.m. (ET).
Refund Program and Practices Motion
The Debtors are seeking authorization to continue, replace, modify or terminate any refund program and make payments to patients and allow offsets by third-party payors or to otherwise honour accrued prepetition obligations owed under the refund program in the ordinary course of business. Through the refund program, the Debtors routinely issue refunds or are subject to offsets or recoupments for reimbursement of overpayments made by or on behalf of patients resulting from the interaction between the Debtors’ billing procedures, patient medical insurance deductibles and third-party payments. As of the Petition Date, the Debtors estimated that approximately $5.1 million in refunds and credit balances may be due and owing under the refund program, of which approximately $2 million may become due and owing within the first twenty-one days of the bankruptcy proceeding. The Debtors are also requesting authority to continue to issue and pay and allow offsets for the refund program to patients and third-party payors on a post-petition basis, including refunds for overpayments, made prepetition or resulting from prepetition services in the ordinary course of business.
An order approving the Debtors’ motion was entered on May 8, 2019.
Critical Vendors Motion
The Debtors are seeking interim and final authority to pay prepetition of certain critical vendors, subject to the critical vendor caps and to re-issue uncashed, prepetition physician checks. The interim critical vendor cap will not exceed $1.5 million and the final critical vendor cap will not exceed $3 million. The Debtors identify certain critical vendors as physicians, providers of medical supplies, pharmacy, blood suppliers, oxygen and gas suppliers, laboratories, transportation providers, host hospitals, and cleaning and linen services.
An interim order approving the Debtors’ motion was entered on May 8, 2019. A final hearing on the motion is scheduled for May 29, 2019, at 11:00 a.m. (ET).
Warehousemen and Other Lien Claimants Motion
The Debtors are seeking authority to pay certain prepetition claims of warehousemen and other lien claimants. Through the motion, the Debtors are seeking authority to pay certain claims in the amount not to exceed $400,000, absent further order of the Court. The Debtors’ warehousemen are used in the ordinary course of business to store certain goods and other property of the Debtors, such as medical supplies and certain patient records stored on behalf of certain physician groups.
An order approving the Debtors’ motion was entered on May 8, 2019.
Wages and Benefits Motion
The Debtors seek authority to pay certain prepetition employee obligations and maintain and continue employee benefits programs. As of the Petition Date, the Debtors employed approximately 3,500 employees. Through the motion, the Debtors are seeking authorization to pay in the ordinary course of business, employee obligations whether they accrued pre or post-petition. The aggregate cash payments on account of prepetition compensation obligations shall not exceed $13,650 per individual employee. The Debtors represent that they will not pay any amounts over a total aggregate amount of $6.5 million on an interim basis.
An order approving the Debtors’ motion was entered on May 8, 2019.
Unexpired Leases and Executory Contracts Motion
The Debtors seek authority to reject certain unexpired leases of nonresidential real property and executory contracts effective as of the Petition Date. The Debtors identified certain unexpired nonresidential real property leases for premises they no longer use. The Debtors state that the leases have no ongoing value and are draining the Debtors’ resources. A hearing on the motion is scheduled for May 29, 2019, at 11:00 a.m. (ET).