For more than 150 years, those living in Manhattan’s Greenwich Village relied on the health care services of St. Vincent’s Catholic Medical Center. In April 2010, after years of financial struggles, the hospital’s board of directors made the difficult decision to file for chapter 11. [1] Due to St. Vincent’s cozy former location in the heart of the Big Apple, the hospital’s bankruptcy filing has become one of the more notable cases among a wave of hospital filings in recent years.
While there have been many twists and turns in St. Vincent’s bankruptcy case, the U.S. District Court for the Southern District of New York rendered an opinion on appeal last month highlighting the potential extent of the automatic stay under § 362 of the Bankruptcy Code. In particular, the court held, at least within the unique circumstances of the St. Vincent’s bankruptcy, that the automatic stay applies to litigation by third parties regarding the release of public records, insofar as the motivation for obtaining the records may infringe upon the province of the bankruptcy estate.
The genesis of the appeal originates from the closing of St. Vincent’s shortly after the filing. In conjunction with its bankruptcy filing, St. Vincent’s moved for interim and final orders authorizing it to close pursuant to a plan previously adopted by its Board of Directors and approved by the New York State Department of Health. On April 16, 2010, the bankruptcy court entered an order granting the hospital’s motion to close an interim basis. Thereafter, a group of plaintiffs brought a state court action against the Department of Health and its commissioner, alleging that various laws were violated in approving the closure of St. Vincent’s, and seeking to enjoin any further action to close St. Vincent’s. This litigation was quickly stopped in its tracks when the court entered an order on April 22, 2010, staying the litigation. The court subsequently issued a decision on May 14, 2010, authorizing St. Vincent’s to be closed on a permanent basis.
Undaunted, Erica Kagan, an attorney at the firm that had represented the plaintiffs in the state court litigation, made a request to the Department of Health under New York’s Freedom of Information Law for records pertaining to the closure of St. Vincent’s. When her request went unrequited, she commenced another state court proceeding against the Department of Health resulting in an order to show cause on “why an order should not be entered ordering the Department of Health to provide [the] Petitioner with any and all documents related to any and all closure plans of St. Vincent’s.”
St. Vincent’s responded to the second state court proceeding by moving before the bankruptcy court to enforce the automatic stay. The court obliged and entered an order on Sept. 9, 2010, enjoining Kagan “from taking any actions and otherwise proceeding in furtherance of or in connection with the State Court Action.”
On appeal to the District Court, Kagan put forth four arguments, only two of which the Court found warranted much discussion. The first of the two points was whether the automatic stay applied to the state court proceeding given that the proceeding was brought against the Department of Health, rather than with the debtor, and with the singular purpose of obtaining information. The second and interrelated issue was whether the bankruptcy court abused its discretion in using its equitable powers under § 105(a) of the Code to extend the reach of the automatic stay over the state court proceeding against the Department of Health.
In addressing these two points, the district court noted that the supporting documents filed by Kagan in the state court proceeding asserted several “incendiary allegations” with respect to the operation of St. Vincent’s—including allegations of fraud and that the bankruptcy filing was part of a concerted plan to further a real estate deal involving the hospital’s location. Additionally, the supporting documents contained allegations against the Department of Health that were nearly identical to the claims asserted by the plaintiffs in the earlier stayed state court litigation. These items led the district court, as well as the bankruptcy court previously, to draw upon a motive from her action, in that Kagan, by requesting the release of Department of Health records, was attempting to conduct discovery as a prelude to bringing an action for fraud or to recover assets. Such an eventual suit would essentially amount to an act to obtain or exercise control over property of the estate in violation of the automatic stay.
Consequently, although Kagan’s action sought only records from a nondebtor entity, the automatic stay applied as the apparent end goal would have infringed on authority exclusively vested with the bankruptcy estate. Moreover, the district court determined that even if the automatic stay under § 362 did not apply to an action against a nondebtor entity, the equitable powers of § 105(a) could be used to extend the automatic stay in a situation such as St. Vincent’s in which litigants are attempting to usurp authority belonging exclusively to the estate.
While the district court couched its language, noting that the automatic stay bars actions “against third-parties that would have an adverse impact on the estate” and making it clear in this instance that Kagan’s motivation was dispositive, it nonetheless raises the question of what should a court do when the impetus is not so apparent? In this vein, the district court may have been overly dismissive of another argument postulated by Kagan, that the “public’s right to access public documents may not be superseded.”
Freedom of Information Laws were enacted to protect the public’s interest in public information. With this decision, the district court may have crafted a potentially nebulous bankruptcy exception to the public interest, and one that might teeter on subjective interpretations of motive. As such, the district court’s decision could lead to a conflict between the public’s right to access information against the protections of bankruptcy filing. Regardless of what the future holds, the district court’s holding has cleared the path for the St. Vincent’s bankruptcy to proceed unfettered by the public consternation that it has stirred, at least for the time being.
1. Case No. 10-11963 (CGM), S.D.N.Y.