Legislative Update Health Care Provisions and Asset-backed Securitizations Under the Proposed Bankruptcy Bill

<h3>Health Care Provisions</h3>

<h4>Increased Duties</h4>

<p>The bills amend various sections of the Bankruptcy Code to provide for increased
duties for the trustee in health care bankruptcies.

</p><h4>Patient Records</h4>

<ul>
<li>The proposed bills set forth a procedure for disposing patient records when the
estate does not have enough funds to pay to store the records.

</li><li>The bills add §351, requiring the trustee to publish notice of its intent to
destroy patient records that are not claimed by either patients or their insurance
carriers within 365 days after the notice is published.

</li><li>After the 365-day period has run and if the records have not been claimed,
the trustee is required to either shred or burn written documents or, if the records
are stored electronically, to destroy the records so that they can never be retrieved.
</li></ul>

<h4>Health Care Closing Costs</h4>

<ul>
<li>The bills provide for administrative expense priority under a new §503(b)(8)
for the costs associated with closing a health care business.

</li><li>Such costs can include the costs associated with disposing of patient records and
moving patients to alternative facilities.

</li><li>Trustees and federal agencies are entitled to such administrative expense claims.
</li></ul>

<h4>Appointment of Ombudsman</h4>

<ul>
<li>The bills provide for the appointment of a disinterested ombudsman to act as a
patient advocate.

</li><li>The ombudsman will be appointed within 30 days after the commencement of the
case.

</li><li>The role of the ombudsman is to monitor and report to the court on the quality
of patient care.

</li><li>The ombudsman is required to keep confidential all information relating to patient
records.
</li></ul>

<h4>Additional Trustee Duties</h4>

<ul>

<li>Trustee duties under the bills include the duty to "[u]se all reasonable and best
efforts to transfer patients from a health care business that is in the process of being
closed."

</li><li>What constitutes "reasonable and best efforts" for an administratively insolvent
estate is not self-evident.
</li></ul>

<h4>Sale of Assets by Nonprofits</h4>

<ul>
<li>The bills require that any sale of estate assets involving a nonprofit debtor
comply with otherwise applicable law.

</li><li>Health care bankruptcy experts observe that this may significantly complicate the
disposition of assets in health care cases involving nonprofit debtors.
</li></ul>

<h4>Exception to Automatic Stay</h4>

<ul>
<li>The bills create an exception to the automatic stay, allowing the Secretary of
Health and Human Services to exclude the health care debtor from Medicare.

</li><li>Health care bankruptcy experts observe that this provision may conflict with the
anti-discrimination provisions of §525.
</li></ul>

<h3>Asset-backed Securitizations</h3>

<h4>New Rules for Securitizations</h4>

<ul>
<li>In an asset-backed securitization, a company transfers certain of its assets
(accounts receivable, for example), to a bankruptcy remote vehicle in exchange for
value.

</li><li>One goal of an asset securitization is to lower borrowing costs by ensuring that
the transferred assets securing the financing are not estate property in the bankruptcy
of the transferor.
</li></ul>

<h4>Bankruptcy Attacks</h4>

<ul>
<li>The validity of asset securitizations are presently unclear.

</li><li>Some argue that under present law, the assets transferred are not property of
the estate.

</li><li>Others argue that the assets remain property of the estate or, if not, the
transfer itself is subject to attack under the avoidance powers.
</li></ul>

<h4>Carve-out of Bankruptcy Estate</h4>

<ul>
<li>Under the bill, estate property will not include assets that are transferred
pre-petition to a bankruptcy remote vehicle in connection with an asset-backed
securitization.

</li><li>The bill validates asset-backed securitizations to the extent that they purport
to effectuate a pre-petition transfer of the debtor's assets. New §541(b)(8)
provides that property of the estate does not include:
<blockquote>
[a]ny eligible asset (or proceeds thereof), to the extent that such eligible
asset was transferred by the debtor, before the date of commencement of the
case, to an eligible entity in connection with an asset-backed securitization,
except to the extent such asset (or proceeds or value thereof) may be
recovered by the trustee under §550 by virtue of avoidance under
§548(a).
</blockquote>
</li></ul>

<h4>Meaning of "Eligible Asset"</h4>

<ul>
<li>In order to qualify for the exclusion, a transferred asset must be an "eligible
asset" within the meaning of the new definition that is included in new §541(f).

<ul><li>
Inventory is <i>not</i> included within that definition.

</li><li>Consumer and trade receivables are included in the definition.
</li></ul></li></ul>

<h4>Bankruptcy Attacks that May Survive Enactment</h4>

<ul>

<li>An involuntary case may be commenced against a bankruptcy remote vehicle (BRV)
notwithstanding any agreement to the contrary.

</li><li>A BRV may be subject to a substantive consolidation order.

</li><li>A transfer of assets to a BRV may constitute an actual fraudulent transfer.
</li>