Bankruptcy and Governmental Entities

If Memorial Hospital Of Sweetwater County Borrows $50 Million And Can’t Make Its Payments, Could The Hospital File Bankruptcy To Reorganize, Reduce Its Debt And Survive?

 

No. Because our local hospital is a governmental entity, in the event of a bond default it would not be eligible to file for bankruptcy under chapter 7 (liquidation), chapter 11 (business reorganization) or chapter 13 (individual reorganization) of the Bankruptcy Code.

Somewhat surprisingly, the hospital would also not be eligible to file chapter 9 bankruptcy (reorganization for municipalities), for two reasons: (1) the hospital, although it is a governmental entity, is not a “municipality” under the Bankruptcy Code; and (2) even if it were, there is no Wyoming state statute authorizing a county hospital to file for bankruptcy (which would be required under federal law).

The only domestic bankruptcy chapter left is 12, which applies to family farmers and professional fisherman. The hospital board members would have to plant a really, really big garden or host a monster ice fishing derby to be eligible to file for bankruptcy reorganization under chapter 12.

The hospital’s proposed $50 million ambulatory surgical center may or may not be a good idea. It might well be a good idea, as federal health care law and resulting insurance company practices apparently favor such facilities over traditional in-patient treatment. Then again, maybe the newly vacant office building across the street from the hospital could be retrofitted for less than $50 million.

I wish the best for our local hospital and I express no opinion about its financial condition, but what happens if the hospital issues $50 million of “BBB” bonds as proposed and then despite best efforts can’t make the payments? Would the bondholders turn the hospital over to collections?

Unlike a private corporation, which can seek bankruptcy protection, force bondholders to take a haircut, reduce its debt and survive (e.g., General Motors in 2009), Memorial Hospital of Sweetwater County would not have that option.

The likely answer is that the hospital, in the event of a potential bond default, would ask the county commissioners shore up its finances by increasing the county’s annual payments to the hospital from the current level of $1.5 million per year to some significantly higher number. It would not help for the hospital board to promise now that it won’t do that, because, under Wyoming law, a current hospital board does not have the authority to bind a future hospital board from not asking for more money from a county.

As one federal court noted, “Congress did not intend that the Bankruptcy Code could solve all problems, least of all the financial problems of governmental units.”

The hospital board members work very hard and receive no monetary compensation for their hundreds of hours of effort, but they and the county commissioners may have tough choices ahead.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

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