One of the goals of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is to provide greater protections to patients in health care business bankruptcies. See Pub.L. No. 109-8. To that end, new Bankruptcy Code provisions have been enacted to specifically address issues that arise in health care business bankruptcies. For example, §101(27A) now defines health care businesses as hospitals, nursing homes, physician practices and other entities that provide diagnosis or treatment of injury or disease.
Section 351 is another of the new health care provisions. It provides a strict procedure that must be followed if a health care business files bankruptcy and does not have sufficient funds to pay for the storage of patient records as required under federal or state law. (While state laws vary, typically, health care businesses are required to store patient records for seven years.)
Specifically, Code §351 states:
If a health care business commences a case under chapter 7, 9 or 11 and the trustee does not have a sufficient amount of funds to pay for the storage of patient records in the manner required under applicable Federal or State law, the following requirements shall apply:
(1) The trustee shall-
(A) promptly publish notice in 1 or more appropriate newspapers that if patient records are not claimed by the patient or an insurance provider (if applicable law permits the insurance provider to make that claim) by the date that is 365 days after the date of that notification, the trustee will destroy the patient records; and
(B) during the first 180 days of the 365-day period described in subparagraph (A), promptly attempt to notify directly each patient that is the subject of the patient records and appropriate insurance carrier concerning the patient records by mailing to the most recent known address of that patient or a family member or contact person for that patient and to the appropriate insurance carrier an appropriate notice regarding the claiming or disposing of patient records…
11 U.S.C. §351.
Section 351 is triggered when a health care business is liquidating either under chapter 7 or chapter 11. The requirements of §351 can be costly. Depending on the size of the health care business, medical record storage costs for one year can range from hundreds of thousands to millions of dollars. In addition, the trustee must employ individuals to mail out the notices to all patients and also employ individuals to turn over the medical records to the patients or insurance companies as requested for a year. The cost of complying with §351 can far exceed the money remaining in the bankruptcy estate.
So how does the trustee pay for the storage and dissemination of medical records? In an attempt to address this issue, §503(b)(8) provides that the actual necessary costs and expenses incurred by a trustee in disposing of patient records in accordance with §351 are provided administrative priority. However, the enormous cost of complying with §351 can easily render an estate administratively insolvent. If there is not enough money in the estate to pay for the storage and dissemination of the medical records, the legislative history of §351 provides a solution: “It is anticipated that if the estate of the debtor lacks the funds to pay for the costs and expenses related to the above [§351], the trustee may recover such costs and expenses under §506(c) of the Bankruptcy Code.” House Report No. 109-31(I), April 8, 2005.
Section 506(c) states:
The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim…
11 U.S.C. §506(c).
Section 506(c) allows a trustee to surcharge a creditor’s collateral. However, it is extremely unlikely, if not impossible, for a creditor to take a security interest in patient medical records for a variety of reasons, including patient confidentiality. Therefore, if the medical records are not “property securing an allowed secured claim,” then how can a trustee use §506(c) to surcharge parties for the cost of complying with §351?
While it does not appear that any court has issued a published opinion on this issue, it has been raised in several courts. In St. Joseph’s Hospital of Huntingburg Inc., the chapter 7 trustee filed motions to surcharge the collateral of three secured creditors to pay for the costs of complying with §351, pursuant to §506(c). None of the three creditors had a security interest in the medical records. One of the creditors had a security interest in the hospital in which the records were stored, the second creditor had a security interest in a medical office building associated with the hospital and the third creditor had a security interest in accounts receivable of the hospital. The trustee argued that each of the three creditors would benefit from the storage and dissemination of the medical records. According to the trustee, the creditors with security interests in the hospital and medical office building would benefit because the records would be removed from the hospital and medical office building, allowing the creditors to foreclose and ultimately sell the property. Additionally, the creditor with the security interest in the accounts receivable would benefit because the creditor needed access to the medical records to continue collecting the accounts receivable.
Although each of these motions were resolved consensually before the bankruptcy court could rule on whether a trustee could charge secured creditors who do not have a security interest in the medical records for the cost of disposing of those medical records, this case highlights the that problem the legislative history of §351 can create for secured creditors. It appears, based on the legislative history, that a trustee can argue that any secured creditor must pay for the storage and dissemination of medical records in a health care business liquidation.