Case Document 195 Filed in TXSB on 03/31/15 Page 1 of 8

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1 Case Document 195 Filed in TXSB on 03/31/15 Page 1 of 8 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION IN RE: UNIVERSITY GENERAL HEALTH SYSTEM, INC., et al., Debtors. 1 Chapter 11 Case No Jointly Administered DEBTORS MOTION TO APPROVE SALE OF SUBSTANTIALLY ALL THE ASSETS OF NON-DEBTOR SUBSIDIARIES PURSUANT TO 11 U.S.C. 363(b) A HEARING WILL BE CONDUCTED IN THIS MATTER ON APRIL 27, 2015, at 1:00 P.M. CT IN COURTROOM 600, 515 RUSK, HOUSTON, TEXAS THIS MOTION SEEKS AN ORDER THAT MAY ADVERSELY AFFECT YOU. IF YOU OPPOSE THE MOTION, YOU SHOULD IMMEDIATELY CONTACT THE MOVING PARTY TO RESOLVE THE DISPUTE. IF YOU AND THE MOVING PARTY CANNOT AGREE, YOU MUST FILE A RESPONSE AND SEND A COPY TO THE MOVING PARTY. YOU MUST FILE AND SERVE YOUR RESPONSE WITHIN 23 DAYS OF THE DATE THIS WAS SERVED ON YOU. YOUR RESPONSE MUST STATE WHY THE MOTION SHOULD NOT BE GRANTED. IF YOU DO NOT FILE A TIMELY RESPONSE, THE RELIEF MAY BE GRANTED WITHOUT FURTHER NOTICE TO YOU. IF YOU OPPOSE THE MOTION AND HAVE NOT REACHED AN AGREEMENT, YOU MUST ATTEND THE HEARING. UNLESS THE PARTIES AGREE OTHERWISE, THE COURT MAY CONSIDER EVIDENCE AT THE HEARING AND MAY DECIDE THE MOTION AT THE HEARING. REPRESENTED PARTIES SHOULD ACT THROUGH THEIR ATTORNEY. TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE: 1 The Debtors and the last four digits of their respective taxpayer identification numbers are as follows: University General Health System, Inc. (2436), UGHS Autimis Billing, Inc. (3352), UGHS Autimis Coding (3425), UGHS ER Services, Inc. (6646), UGHS Hospitals, Inc. (3583), UGHS Management Services, Inc. (4100), UGHS Support Services, Inc. (3511), University General Hospital, LP (7964), and University Hospital Systems, LLP (3778).

2 Case Document 195 Filed in TXSB on 03/31/15 Page 2 of 8 The debtors and debtors in possession in the above-captioned cases (collectively, the Debtors ) file this Motion to Approve Sale of Substantially All the Assets of Non-Debtor Subsidiaries Pursuant to 11 U.S.C. 363 (the Motion ). JURISDICTION AND VENUE 1. This Court has jurisdiction to consider this Motion under 28 U.S.C. 157 and This is a core proceeding under 28 U.S.C. 157(b). Venue of these cases and this Motion in this District is proper under 28 U.S.C and SUMMARY OF RELIEF REQUESTED 2. Prior to the petition date, the Debtors negotiated the sale of substantially all the assets of certain non-debtor subsidiaries and affiliates that directly own and operate senior care living facilities. The Debtors will derive substantial benefit from the proposed sale in form of (a) the satisfaction of debts for which UGHS has pledged its interest in a number of subsidiaries, (b) the repayment of intercompany loans and (c) elimination of substantial amounts of debt from their consolidated balance sheet. Accordingly, the Debtors seek approval of the APA and the Amendment (each defined below) and authority to close the sale of their non-core senior care living business pursuant to 11 U.S.C. 363(b). FACTUAL BACKGROUND 3. The Debtors in these jointly administered cases operate University General Hospital, a 69-bed general acute care hospital near the Texas Medical Center. 4. In 2011, University General Health System, Inc. ( UGHS ), acquired a separate line of business, pursuant to which certain affiliates own and operate senior care living facilities. The corporate organization of the senior care living business is as follows: UGHS owns of UGHS Senior Living, Inc. ( Senior Living ); Senior Living owns 51% of TrinityCare Senior 2

3 Case Document 195 Filed in TXSB on 03/31/15 Page 3 of 8 Living, LLC ( TrinityCare ); and Senior Living owns of (i) UGHS Senior Living of Pearland, LLC, (ii) UGHS Senior Living of Port Lavaca, LLC, (iii) UGHS Senior Living of Knoxville, LLC, and (iv) TrinityCare Lighthouse of Pearland, LLC (collectively, the Operating Companies ). The assets and operations of the senior care living business are owned by the Operating Companies and TrinityCare. An organizational chart showing the ownership of the Debtors, Senior Living, TrinityCare and the Operating Companies is attached as Exhibit A. 5. Neither Senior Living, TrinityCare, nor the Operating Companies are Debtors in these bankruptcy cases. 6. In 2014, UGHS determined to dispose of assets that were not related to its core hospital business. In May 2014, the Company engaged Dougherty & Company LLC ( Dougherty ) to conduct a sale process of the senior care living business (i.e., Senior Living, TrinityCare and the Operating Companies). Following conclusion of the sale process, UGHS selected the transaction proposal submitted by Cornerstone Healthcare Group Holding, Inc. ( Cornerstone ) and, on December 12, 2014, executed an asset purchase agreement with Cornerstone (as amended, supplemented, or modified from time to time in accordance with its terms, the APA ) Subject to the terms of the APA, Cornerstone agreed to acquire the senior care living business for a purchase price of approximately $27.7 million, including approximately $16.2 million of assumed liabilities and approximately $11.5 million in cash (subject to a purchase price adjustment and an earn-out). 8. On February 25, 2015, two days prior to the petition date, the proposed transaction contemplated by the APA (the Sale Transaction ) was approved by the U.S. Housing and Urban Development Department ( HUD ), which guarantees certain mortgages 2 A copy of the APA is available upon request from Debtors counsel. 3

4 Case Document 195 Filed in TXSB on 03/31/15 Page 4 of 8 securing the indebtedness of Senior Living and the Operating Companies. HUD s approval terminates 45 days after the date of its approval letter. The Debtors are in the process of requesting an extension from HUD to close this transaction by no later than May 8, OVERVIEW OF PROPOSED SALE TRANSACTION 9. Under the terms of the APA, Cornerstone is purchasing substantially all of the assets of the Operating Companies and TrinityCare. The consideration for the sale of these assets is (a) assumption of approximately $16.2 million of the Operating Companies indebtedness to HUD, and (b) cash consideration of $11,510,000 (the Sale Proceeds ), minus the Operating Companies unpaid indebtedness (other than the assumed indebtedness), change of control payments, and transaction expenses, and subject to a post-closing working capital adjustment and an earn-out. See APA at Sec. 3.1, 3.5, and Under the terms of the APA, UGHS agreed to indemnify Cornerstone for certain obligations and post-closing adjustments and UGHS has other obligations under the APA. See APA at Sec As a result of UGHS s bankruptcy filing, the parties to the APA agreed to amend the APA pursuant to the terms of Amendment No. 1 (the Amendment ) to provide that the Sale Proceeds shall be subject to an $800,000 holdback for post-closing purchase price adjustments, as security for UGHS s indemnity obligations and as otherwise described below. 4 The holdback will be held in a segregated account by Cornerstone for a period of approximately 90 days while the purchase price adjustment is finalized pursuant to Section 3.5 of the APA. These funds will be used, among other things, to pay for the net working capital shortfall and closing items such as the preparation of tax returns for the seller entities, the transfer of physical 3 There is the potential for additional consideration of over $3.3 million in the form of an earn-out. See APA at Sec However, the sellers do not anticipate meeting any of the benchmarks necessary to trigger the earn-out. 4 A copy of the Amendment is available upon request from Debtors counsel. 4

5 Case Document 195 Filed in TXSB on 03/31/15 Page 5 of 8 assets fee and title fee associated with the assumption of the HUD debt, legal fees and certain capital expenditures that may be required at the Knoxville location in order to bring the facility into compliance with its state licensing requirements. In the event that there is any portion of the holdback remaining at the end of such period, the unused portion of the holdback will be allocated in accordance with the APA and as set forth below. 11. On March 17, 2014, as part of a separate $5.5 million loan transaction, UGHS pledged its equity interests in the Operating Companies to White Oak Asset Finance, LLC ( White Oak ). As of March 31, 2015, White Oak asserts that it is owed in excess of $8.5 million dollars. In full settlement of White Oak s claims and subject to the Closing and payment occurring on or before May 8, 2015, UGHS and White Oak have agreed that at the Closing, White Oak shall receive payment in an amount equal to $7.9 million dollars, on account of its claim against UGHS under the loan as secured by UGHS pledge of the equity interests in the Operating Companies. Following payment of the $7.9 million dollars, so long as such payment was received on or prior to May 8, 2015, White Oak s loan to UGHS will be deemed to have been paid in full and all remaining Sale Proceeds will be paid to UGHS. 12. As security for the White Oak loan, UGHS also pledged its equity interests in two subsidiaries that are not part of the senior living transaction. 5 So long as White Oak has received payment of the $7.9 million dollars on or prior to May 8, 2015, White Oak s loan will be deemed to have been paid in full and satisfied as part of the Sale Transaction and, in connection therewith, White Oak will release its liens and rights under that pledge by UGHS of its interest in these two non-debtor entities. UGHS believes that these entities are solvent and will provide additional value to its estate. In the event White Oak does not receive payment of $7.9 million 5 These pledged entities are UGHS SurgiCare-Woodlands, LLC and ASP of Dickinson, LLP. 5

6 Case Document 195 Filed in TXSB on 03/31/15 Page 6 of 8 on or before May 8, 2015, notwithstanding anything to the contrary set forth herein, White Oak will be free to assert the full amount of its claims under the loan agreement as well as all of its rights under all pledges of equity interests granted to it by UGHS. 13. Donald Sapaugh was involved in the negotiation of the APA and the Sale Transaction and executed it on behalf of UGHS, TrinityCare, Senior Living, and the Operating Entities. Sapaugh resigned as the president of UGHS the day before the petition date, but he remains a director of UGHS. The APA and the Sale Transaction were approved by the other two directors of UGHS prior to the petition date. 14. As part of the Sale Transaction, Sapaugh entered into an employment agreement with Cornerstone Senior Living, Inc., which will become effective upon closing. Pursuant to this employment agreement, Sapaugh will be the president and CEO of CHG Senior Living, Inc. and any affiliates related to the senior living business that is being sold to Cornerstone. The employment agreement permits Sapaugh to continue serving on the UGHS board of directors. Once his employment with Cornerstone commences, Sapaugh s base salary will be $250,000 plus a performance bonus of between 50% and 150% of his base salary. Sapaugh is also entitled to contingent incentive compensation. Additionally, Sapaugh has personal liability on several of the debts that will be satisfied from the sale proceeds and owns a minority interest in TrinityCare. 15. In connection with closing the Sale Transaction, UGHS will enter into a separate non-competition agreement pursuant to which it will agree not to compete with Cornerstone in the senior care living business. The Debtors overall restructuring goals include liquidating their non-core businesses so that they may emerge from bankruptcy with a focus on University General Hospital and related businesses. 6

7 Case Document 195 Filed in TXSB on 03/31/15 Page 7 of 8 REQUEST FOR RELIEF 16. The Debtors file this Motion seeking (a) approval of the APA and the Amendment, (b) authority for UGHS to execute, deliver and perform its obligations under the APA and the Amendment, and (c) authority under 11 U.S.C 363(b) to close the Sale Transaction with Cornerstone on the terms set forth in the APA (as modified by the Amendment) as the parent company of the sellers Senior Living, TrinityCare, and the Operating Companies. 17. The Debtors are not selling any property of the estate under the APA and, therefore, are not seeking approval of this transaction under 11 U.S.C. 363(f). 18. UGHS s decision to enter into the APA and the Amendment is based on the sound business judgment of its board of directors. 6 As noted above, the APA and the Amendment were approved by the two directors other than Sapaugh due to his personal interests in the transaction. 19. Substantial and tangible benefits will flow to the UGHS estate as a result of the Sale Transaction, including (a) the satisfaction of debts for which UGHS has pledged its interest in a number of subsidiaries, (b) the repayment of intercompany loans and (c) elimination of substantial amounts of debt from their consolidated balance sheet. 20. Accordingly, the APA, the Amendment, and the Sale Transaction are in the best interests of the Debtors estates and creditors. 6 Approval of 363(b) transactions requires that the bankruptcy court find that the debtor justify[] the proposed transaction. That is, for the debtor-in-possession... to satisfy its fiduciary duty to the debtor, creditors and equity holders, there must be some articulated business justification for using, selling, or leasing the property outside the ordinary course of business. In re ASARCO LLC, 441 B.R. 813, 823 (S.D. Tex. 2010) (quoting Institutional Creditors of Continental Air Lines, Inc. v. Continental Air Lines, Inc. (In re Continental Air Lines, Inc.), 780 F.2d 1223, 1226 (5th Cir. 1986); see also In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983); In re Ionosphere Clubs, Inc., 100 B.R. 670, 675 (Bankr. S.D.N.Y. 1989). 7

8 Case Document 195 Filed in TXSB on 03/31/15 Page 8 of 8 CONCLUSION WHEREFORE, the Debtors respectfully request that the Court enter an order approving the APA and the Amendment and authorizing the Debtors to close the Sale Transaction on the terms set forth in the APA and related agreements and grant such other and further relief as may be just and proper. Dated: March 31, 2015 Porter Hedges LLP By: /s/ John F. Higgins John F. Higgins State Bar No Joshua W. Wolfshohl State Bar No Aaron J. Power State Bar No Main Street, 36 th Floor Houston, TX (713) (713) (fax) Proposed Counsel for Debtors and Debtors in Possession 8

9 Case Document Filed in TXSB on 03/31/15 Page 1 of 1 University General Health System, Inc. a Nevada corporation (parent corporation) UGHS Organizational Chart (Updated March 2015) UGHS Management Services, Inc. 70% Southeast Healthcare Management Services, LLC a Texas limited liability company 5% Jacinto Management Services, LLC a Texas limited liability company 20% VPASC, Management LLC, a Texas limited liability company UGH Dallas Management, LLC, a Texas Limited Liability Company UGHS Hospitals, Inc. UGHS ER Services, Inc. a Texas corporation UGHS Alvin Hospital, Inc. a Texas corporation UGHS Dallas Hospitals, Inc. Dufek Massif Hospital Corporation, d/b/a Southampton Community Hospital and University General Hospital Dallas Departments of UGH Dallas: UGH Ennis PT UGH Waxahachie Diagnostic Center UGH Waxahachie Surgery Center UGH Texas Rehabilitation Solutions UGHS Pearland Hospital, Inc. a Texas corporation UGHS Ancillary Services, Inc. University Hospital Systems LLP a Delaware limited liability partnership and the General Partner of UGH, LP % %.001% University General Hospital, LP a Texas limited partnership UGHS Physician Services, Inc. a Texas non-profit corporation Oaks Family Medical Practice, P.A. Kovaks/Mencer, P.A. Texas Anesthesia & Pain Management., P.A. Departments of University General Hospital, LP: University Wound Healing and Hyperbaric Center My Quest Weigh Loss Program UGH Baytown Endoscopy Center UGH Baytown Imaging UGH Baytown Sleep UGH C. Foster & Associates Dickinson UGH C. Foster & Associates Seabrook UGH C. Foster & Associates Pasadena UGH C. Foster & Associates S.W. Houston 25% Quality Care Plus UGHS Infusion Management UGHS Baytown Physician Services UGHS Support Services, Inc. 25% UGHS Real Estate, Inc. UGHS Autimis Billing, Inc. a Texas corporation UGHS Pearland Hospital Real Estate, LLC, a Texas corporation UGHS Autimis Coding, Inc. Sybaris Group, Inc. UGHS Practice Support Services, LLC a Texas limited liability company Legend Sellers Under Cornerstone APA Equity Interests Pledged to White Oak Chapter 11 Debtors UGHS Senior Living, Inc. 51% TrinityCare Senior Living, LLC a Texas limited liability company Manager of UGHS Senior Living LLC s UGHS Senior Living of Pearland, LLC UGHS Senior Living of Port Lavaca, LLC UGHS Senior Living of Knoxville, LLC each a Texas Limited Liability Company and owned by UGHS Senior Living, Inc. UGHS Pearland MOB, LLC, a Texas corporation UGHS Senior Living Real Estate of Pearland, LLC EIN TrinityCare Lighthouse of Pearland, LLC a Texas limited liability company EXHIBIT A

10 Case Document Filed in TXSB on 03/31/15 Page 1 of 2 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION IN RE: UNIVERSITY GENERAL HEALTH SYSTEM, INC., et al., Debtors. 7 Chapter 11 Case No Jointly Administered ORDER APPROVING SALE OF SUBSTANTIALLY ALL THE ASSETS OF NON-DEBTOR SUBSIDIARIES PURSUANT TO 11 U.S.C. 363(b) (Relates to Doc. No. ) Upon consideration of the Debtors Motion to Approve Sale of Substantially All the Assets of Non-Debtor Subsidiaries Pursuant to 11 U.S.C. 363(b) (the Motion ); and due and sufficient notice of the Motion having been given under the particular circumstances; and it appearing that no other or further notice need be provided; and it appearing that the relief requested by the Motion is in the best interests of the Debtors, their estates, their creditors and other parties in interest and represents an exercise of sound business judgment by the Debtors; and after due deliberation thereon and good and sufficient cause appearing therefor, it is hereby, ORDERED that the Motion is GRANTED; and it is further ORDERED that University General Health System, Inc. ( UGHS ) is authorized (i) to execute the APA and the Amendment (as defined in the Motion) (collectively, the Amended 7 The Debtors and the last four digits of their respective taxpayer identification numbers are as follows: University General Health System, Inc. (2436), UGHS Autimis Billing, Inc. (3352), UGHS Autimis Coding (3425), UGHS ER Services, Inc. (6646), UGHS Hospitals, Inc. (3583), UGHS Management Services, Inc. (4100), UGHS Support Services, Inc. (3511), University General Hospital, LP (7964), and University Hospital Systems, LLP (3778).

11 Case Document Filed in TXSB on 03/31/15 Page 2 of 2 APA ) (ii) to perform its obligations under the Amended APA and (iii) to close the transactions contemplated therein; and it is further ORDERED that the Amended APA is approved and is a valid, binding and enforceable agreement of UGHS; and it is further ORDERED that at the closing of the Amended APA (the Closing ), White Oak Asset Finance, LLC ( White Oak ) shall receive $7.9 million dollars from the sale proceeds in complete satisfaction of all debts and obligations owed to it by UGHS and, so long as such amounts were received by White Oak on or before May 8, 2015, White Oak shall release all of its pledges of equity interest in the non-debtor subsidiaries and affiliates of UGHS; and it is further ORDERED that in the event White Oak does not receive payment of $7.9 million on or before May 8, 2015, White Oak will be free to assert the full amount of its claims under the loan agreement as well as all of its rights under all pledges of equity interests in the non-debtor subsidiaries and affiliates of UGHS granted to it by UGHS; and it is further ORDERED that any sales proceeds remaining after all payments and reserves under the Amended APA and the $7.9 million payment to White Oak shall be distributed to UGHS. Dated: Houston, Texas, 2015 THE HONORABLE LETITIA Z. PAUL UNITED STATES BANKRUPTCY JUDGE 2