Case 2:18-bk ER Doc 455 Filed 10/10/18 Entered 10/10/18 16:08:47 Desc Main Document Page 1 of 34

Transcription

1 Main Document Page of SAMUEL R. MAIZEL (Bar No. 0) JOHN A. MOE, II (Bar No. 0) TANIA M. MOYRON (Bar No. ) tania.moyron@dentons.com 0 South Figueroa Street, Suite 00 Los Angeles, California 00-0 Tel: () -00 / Fax: () - Attorneys for the Chapter Debtors and Debtors In Possession UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA - LOS ANGELES DIVISION () -00 In re VERITY HEALTH SYSTEM OF CALIFORNIA, INC., et al., Debtors and Debtors In Possession. Affects All Debtors Affects Verity Health System of California, Inc. Affects O Connor Hospital Affects Saint Louise Regional Hospital Affects St. Francis Medical Center Affects O Connor Medical Center Affects Seton Medical Center Affects O Connor Hospital Foundation Affects Saint Louise Regional Hospital Foundation Affects St. Francis Medical Center of Lynwood Foundation Affects O Connor Foundation Affects O Connor Dialysis Center, Inc. Affects Seton Medical Center Foundation Affects Verity Business Services Affects Verity Medical Foundation Affects Verity Holdings, LLC Affects De Paul Ventures, LLC Affects De Paul Ventures - San Jose ASC, LLC Debtors and Debtors In Possession. Lead Case No. :-bk--er Jointly Administered With: CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk--er CASE NO.: :-bk-0-er CASE NO.: :-bk--er Chapter Cases Hon. Ernest M. Robles DEBTORS OPPOSITION TO MOTION OF STANFORD HEALTH CARE TO ASSUME OR REJECT HEALTH SERVICES AFFILIATION AGREEMENT ON AN EXPEDITED BASIS; MEMORANDUM OF POINTS AND AUTHORITIES; DECLARATION OF CARL JAMES [RELATES TO DOCKET NO. 0] Date: October, Time: :00 a.m. Place: Courtroom East Temple Street Los Angeles, CA 00

2 Main Document Page of () -00 TABLE OF CONTENTS Page I. INTRODUCTION... II. STATEMENT OF RELEVANT FACTS... A. General Background... B. Facts Relevant To Motion... III. ARGUMENT... A. Stanford Has Failed To Meet The Criteria For Expedited Assumption... IV. CONCLUSION... - ii -

3 Main Document Page of TABLE OF AUTHORITIES Page(s) () -00 Cases In re Beker Indus., B.R. 0 (Bankr. S.D.N.Y. )... In re Dana Corp., 0 B.R. (Bankr. S.D.N.Y. 0)... DJS Properties, L.P. v. Simplot, B.R. (D. Idaho 0)... Matter of Dunes Casino Hotel, B.R. (D. N.J. )... In re EnCap Golf Holdings, LLC, 0 WL 0 (Bankr. D. N.J. Dec., 0)... In re Mayer Pollock Steel Corp., B.R. (Bankr. E.D. Pa. )... Moody v. Amoco Oil Co., F.d (th Cir. )... In re Physician Health Corp., B.R. 0 (Bankr. D. Del. 0)..., In re S.N.A. Nut Co., B.R. (Bankr. N.D. Ill. )... Stevens v. CSA, Inc., B.R. (D. Mass. 0)... In re Taber Farm Associates, B.R. (Bankr. S.D.N.Y. 0)... Theater Holding Corp. v. Mauro, F.d (d Cir. )... In re Wheeling-Pittsburgh Steel Corp., B.R. (Bankr. W.D. Pa. )... In re Whitcomb & Keller Mortgage Co., F.d (th Cir. )... - iii -

4 Main Document Page of Statutes U.S.C., et. seq....,, USC a-b(f)... () iv -

5 Main Document Page of () -00 Verity Health System of California, Inc. ( Verity Health or VHS ) and O Connor Hospital ( O Connor, O Connor Hospital or the Debtor ), the debtors and debtors in possession in the above-captioned Chapter bankruptcy cases (collectively, the Debtors ), hereby file their objection (the Objection ) to the Motion of Stanford Health Care To Assume Or Reject Healthcare Services Affiliation Agreement (the Motion ) [Docket No. 0] filed by Stanford Health Care ( Stanford ). I. INTRODUCTION The relief sought by Stanford is premature and inconsistent with the Bankruptcy Code s policy of providing debtors sufficient time to determine their restructuring options and to decide which contracts to assume or reject as part of an overall business plan to maximize the value of their estates. Stanford asks this Court for an order compelling O Connor to assume or reject the Affiliation Agreement (defined below) between it and O Connor by no later than November,. The Affiliation Agreement provides for certain physicians-in-training, called residents and fellows, to receive their training at O Connor. The residents and fellows are paid by their school, Stanford, which in turn is reimbursed by O Connor. O Connor should not be required to make a determination on the time table proposed by Stanford. As an initial matter, the Motion was filed four days before the Verity Health Debtors filed a Bidding Procedures Motion ( Bidding Motion ) for a sale of two of their hospitals: Saint Louise Medical Center and O Connor at a price of approximately $ million; (b) setting bid procedures to establish guidelines for parties interested in making an overbid; (c) setting an auction to be held in late November and for a hearing sale to be held shortly thereafter. [Docket No. ]. The Bidding Motion provides that within hours of the conclusion of the auction, the Debtors will provide notice to executory contract counterparties identifying the successful bidder and the contracts to be assumed and assigned along with the cure amounts. Thus, given this time table, there is no prejudice to Stanford if it has to wait until shortly after the

6 Main Document Page of () -00 conclusion of the auction to learn whether the Affiliation Agreement will be assumed or rejected. In fact, to the extent that Stanford seeks certainty that it will be placing trainee physicians in a financially stable hospital environment, it behooves Stanford to await the results of the auction. Conversely, the prejudice to the Debtors estates of an assumption prior to the auction is obvious. O Connor will be required to pay cure costs of almost $00,000 (according to Stanford s calculations) just weeks before an auction of its assets and without knowing what the successful bidder will require in connection with executory contracts, such as the Affiliation Agreement. While it is possible that Santa Clara County, the current stalking horse, will be the successful bidder and that it will take an assignment of the Affiliation Agreement, only at the conclusion of the auction will the Debtors know this with certainty. The Debtors are hopeful that the auction will result in overbids that will inure to the benefit of all of their creditors. It is also possible that another bidder will emerge which may have its own similar residency training program, in which case O Connor may be required to reject the Affiliation Agreement in order to enter into a transaction which maximizes the value of its assets. O Connor simply needs just a bit more time to make a determination on whether under the current circumstances, assumption is in the best interest of its estate. Stanford asserts that it needs to have certainty that the Affiliation Agreement training program will continue to exist, so it can attract and select doctors it is now interviewing to participate in the program. Stanford is looking to fill eight slots at O Connor for the next year. Stanford admits that it has until January, to confirm its selection of trainees, Motion at page, lines - and that if the O Connor program ceases to exist, Stanford will need to shift trainees to other hospitals. In fact it states that it is preparing for such a possibility. Given the expedited sale process outlined in the Bidding Motion, Stanford will have sufficient time to make its determinations. There is no need to force O Connor to assume the Affiliation Agreement no later than November, when the auction is just a few weeks away. Stanford further argues that assumption is the obvious choice for the Debtors because the Affiliation Agreement is economically favorable to O Connor. However, as indicated in the Declaration of Carl James, in fact, the Affiliation Agreement is not revenue positive for - -

7 Main Document Page of () -00 O Connor. Total estimated costs of the program for are $,,.00, representing a loss of $,0,.00. Declaration of Carl James, page, lines -. There is currently no reason for Stanford to stand ahead of all other unsecured creditors and force the Debtors to assume the Affiliation Agreement on an expedited basis and pay cure amounts that are not yet in its budget. This would be highly prejudicial to O Connor and its affiliated Debtors. Conversely, Stanford is not harmed because its postpetition claims, to the extent not in dispute, would be subject to payment as administrative claims in the ordinary course. As noted in the James Declaration, while O Connor has not yet received an invoice for September from Stanford, upon receipt of such invoice, O Conner will pay any post- petition amounts due to Stanford under the Affiliation Agreement in the ordinary course. Declaration of Carl James ( James Decl. ), page, lines -. The Debtors believe programs for training the nation s future physicians are worthwhile, but the Debtors have an obligation to try to maximize the value of their estates for the benefit of all creditors and should not be forced to assume the Affiliation Agreement without knowing the form of the final sale transaction. Accordingly, Stanford s Motion should be denied. II. STATEMENT OF RELEVANT FACTS A. General Background. On August, (the Petition Date ), the Debtors each filed a voluntary petition for relief under chapter of title of the United States Code, U.S.C.., et seq. (the Bankruptcy Code ).. Since the commencement of their cases, the Debtors continue to operate their businesses, manage their affairs, and administer their estates as debtors in possession pursuant to sections and of the Bankruptcy Code.. An official committee of unsecured creditors was appointed on September,. [Docket No..] - -

8 Main Document Page of () -00. Debtor Verity Health, a California nonprofit public benefit corporation, is the sole corporate member of the following five Debtor California nonprofit public benefit corporations that operate six acute care hospitals, O Connor Hospital, Saint Louise Regional Hospital, St. Francis Medical Center, O Connor Medical Center, Seton Medical Center, and Seton Medical Center Coastside (collectively, the Hospitals ) and other facilities in the state of California.. VHS, the Hospitals, and their affiliated entities operate as a nonprofit health care system, with approximately,0 inpatient beds, six active emergency rooms, a trauma center, eleven medical office buildings, and a host of medical specialties, including tertiary and quaternary care.. O Connor Hospital is a nonprofit public benefit corporation that operates a licensed-bed, general acute care hospital that serves residents from the greater San Jose area. The hospital has an emergency department with emergency treatment stations. It also has surgical operating rooms and two cardiac catheterization labs. The hospital offers a comprehensive range of healthcare services, including emergency, cardiac, orthopedic, cancer, obstetrics, and sub-acute care services. The hospital is accredited by The Joint Commission.. O Connor Hospital owns real property commonly known as: (i) O Connor Dr San Jose, CA, and partial interest in the medical office building thereon; and (ii) 0 Forest Ave, San Jose, CA and the acute hospital, medical office building, and all of the facilities located thereon.. O Connor Foundation was incorporated in and is governed by a Board of Trustees. Charitable donations and endowments help fund the acquisition of new equipment, the expansion of O Connor Hospitals facilities, healthcare services, and community outreach programs. O Connor Hospital is the sole corporate member of O Connor Foundation. - -

9 Main Document Page of () -00 B. Facts Relevant To Motion. O Connor and Stanford are parties to a Healthcare Affiliation Agreement dated as of July, (the Affiliation Agreement or Agreement ). The Agreement provides for Stanford to be responsible for overall administration, control and management of a program (the Program ), which provides medical training at O Connor for physician residents and fellows (the Trainees ). The Program is accredited by the Accreditation Council for Graduate Medical Education ( ACGME ). (James Decl., at, lines -).. Under the Agreement, the Trainees are employees of Stanford and Stanford is responsible for employment benefits and salary of the Trainees. O Connor is required to reimburse Stanford for the amount of such salary and benefits paid by Stanford to trainees for the time the Trainees are on rotation at O Connor. O Connor is also responsible for the payment of all costs and fees associated with the recruitment of Trainees, all costs and fees associated with the Department of Family Medicine Retreats (as defined in the Agreement), and any other costs and fees not assumed by Stanford under Sections.,. and. of the Agreement (James Decl., at, lines -). A copy of the Agreement is attached as Exhibit A to the Declaration of Carl James.. The Centers for Medicare & Medicaid Services ( CMS ) provides funding to O Connor Hospital for medical education; however, this funding does not fully cover the costs of the Program. CMS reimburses O Connor Hospital (according to CMS s regulations) for some of the costs incurred training the Trainees. CMS payments are O Connor s source of funding for O Connor Hospital to reimburse Stanford for the salary and benefits Stanford provides to the Trainees at O Connor Hospital. There are two types of payments CMS makes to O Connor Hospital: direct graduate medical education ( DGME ) payments and indirect medical education ( IME ) payments. (James Decl., at, lines -). - -

10 Main Document Page of () -00. CMS payments are based on O Connor Hospital s Medicare Cost Reports. While the Fiscal Year Medicare Cost Report has not been completed, it is in process of review in conjunction with the Verity Revenue Management Team. Based on the projected information, O Connor Hospital s Fiscal Year IME and DGME income from CMS will be $,,0.00. The costs associated with the program include: (i) medical administration and program fees of $,,.00, (ii) invoiced family residency salaries of $,,.0, (iii) $,.00 in salary and wages paid directly through O Connor Hospital, (iv) insurance expense of $,.00, and (v) other costs of $,.00. Total costs of the program are $,,.00, representing a loss of $,0,.00. (James Decl., at, lines -, page, lines -).. On October,, the Debtors filed Debtors Notice Of Motion And Motion For The Entry Of (I) An Order () Approving Form Of Asset Purchase Agreement For Stalking Horse Bidder And For Prospective Overbidders To Use, ()Approving Auction Sale Format, Bidding Procedures And Stalking Horse Bid Protections, () Approving Form Of Notice To Be Provided To Interested Parties, () Scheduling A Court Hearing To Consider Approval Of The Sale To The Highest Bidder And () Approving Procedures Related To The Assumption Of Certain Executory Contracts And Unexpired Leases [Docket No. ]. The Bidding Motion provides for a fairly expeditious bidding and auction process with a request to the Court that the auction be set for late November.. With respect to executory contacts, the Bidding Motion provides that A bid submitted will be considered a Qualified Bid only if the bid is submitted by a Qualified Bidder and. it identifies with particularity which executory contracts and unexpired leases the Qualified Bidder wishes to assume it contains sufficient information concerning the Qualified Bidder s ability to provide adequate assurance of performance with respect to assumed executory - -

11 Main Document Page of () -00 contracts and unexpired leases. Bidding Motion, at, lines -, at, lines -, and at, lines -.. The Bidding Motion further provides that [Un]less otherwise agreed to by the Debtors and the Successful Bidder, within two () business days after the conclusion of the Auction, the Successful Bidder shall complete and execute all agreements, contracts, instruments, and other documents evidencing and containing the terms and conditions upon which the Successful Bid was made. Within forty-eight () hours following the conclusion of the Auction, the Debtors shall file a notice identifying the Successful Bidder(s) with the Court and shall serve such notice by fax, , or if neither is available, by overnight mail to all counterparties whose contracts are to be assumed and assigned. Bidding Motion, at, lines -. Assuming the Court sets an auction in late November, Stanford will know shortly thereafter whether the Agreement is on the list of executory contracts to be assumed by the successful bidder. III. ARGUMENT A. Stanford Has Failed To Meet The Criteria For Expedited Assumption.. Section (d)() of the Bankruptcy Code provides that a debtor may assume or reject an executory contract at any time prior to the confirmation of a plan of reorganization. U.S.C. (d)(). Permitting the debtor to make its decision as late as the plan confirmation date enables the debtor to carefully evaluate the possible benefits and burdens of an [executory contract]. It is vitally important to all interested parties that the debtor make a prudent assumption or rejection decision.... In re Physician Health Corp., B.R. 0, (Bankr. D. Del. 0) (citing In re Wheeling-Pittsburgh Steel Corp., B.R., (Bankr. W.D. Pa. )). Until assumption or rejection, an executory contract remains in existence, enforceable - -

12 Main Document Page of () -00 by the debtor [against the non-debtor party] but not against the debtor. In re S.N.A. Nut Co., B.R., (Bankr. N.D. Ill. ).. Section (d)() also permits the Court, at the request of a Trustee or DIP to allow a reasonable time to decide whether to assume or reject. See In re Wheeling-Pittsburgh Steel Corp., B.R., (Bankr. W.D. Pa. ); Theater Holding Corp. v. Mauro, F.d, (d Cir. ). What constitutes reasonable time is left to bankruptcy court s discretion in light of all the circumstances of the case. Wheeling-Pittsburgh, B.R. at ; see also In re Beker Indus., B.R. 0, - (Bankr. S.D.N.Y. ). Creditors will frequently argue that the debtor must assume the contract or lease because of its essential nature to the debtor or that the debtor must reject the contract or lease because the debtor cannot cure the defaults and therefore can never assume the contract or lease. However, the reasonable time afforded to a debtor is not solely to analyze the benefits and burdens of the contract. The debtor must also decide whether the assumption on rejection would be beneficial to an effective reorganization. Thus, waiting until a plan can be devised may be essential to evaluating a contract. In re Whitcomb & Keller Mortgage Co., F.d, (th Cir. ); see also DJS Properties, L.P. v. Simplot, B.R., 00 (D. Idaho 0) (denying motion to expedite assumption or rejection of executory contract and allowing debtor to assume or reject postconfirmation). A court may not, however, order the debtor to assume the contract. Stevens v. CSA, Inc., B.R., (D. Mass. 0). Some courts have suggested that, as a minimum, debtors are entitled to days after the filing of the petition to make a decision. See, e.g., In re Taber Farm Associates, B.R., (Bankr. S.D.N.Y. 0).. In deciding whether to accelerate a debtor s decision respecting a given executory contract, the court must balance the interests of the contracting party against those of the debtor and its bankruptcy estate. Physician Health, B.R. at (finding that balance favored - -

13 Main Document Page of () -00 debtors and refusing to shorten deadline); In re Mayer Pollock Steel Corp., B.R., (Bankr. E.D. Pa. ) (refusing to shorten deadline for assumption or rejection when balance of factors favors the debtor). Factors customarily considered by courts in determining whether to shorten a debtor s decision period include (a) the nature of the interests at stake; (b) the balance of the hurt to the litigants; (c) the good to be achieved; (d) the safeguard afforded those litigants; and (e) whether the action to be taken is so in derogation of Congress scheme that the court may be said to be arbitrary. Matter of Dunes Casino Hotel, B.R., (D. N.J. ). In fashioning this balancing of factors, the movant seeking the order to compel assumption or rejection on an accelerated basis bears the burden of demonstrating its entitlement to relief under (d)(). Mayer Pollock, B.R. at.. O Connor has a well-recognized interest in making reasoned determinations about whether to assume or reject all of its executory contracts, including the Agreement with Stanford. This Court should interpret the reasonable time afforded O Connor to make such decisions as prior courts have, consistent with Bankruptcy Code s goal of giving time to debtors to seek rehabilitation. See Dunes Casino Hotel, B.R. at (citing NLRB v. Bildisco and Bildisco, U.S. ()); Moody v. Amoco Oil Co., F.d, (th Cir. ) (observing that interpreting the Bankruptcy Code so as to minimize flexibility and rush the debtor into what may be an improvident decision does not further the purposes of the reorganization provisions ).. In determining whether a debtor must elect to assume or reject an executory contract prior to plan confirmation, the bankruptcy court essentially balances the interests of the bankruptcy estate and its creditors against the interests of the movant. In re EnCap Golf Holdings, LLC, 0 WL 0 at * (Bankr. D. N.J. Dec., 0). Courts examine multiple factors in determining whether to shorten the period of assumption or rejection, including: (i) the importance of the contract to the debtor s business or reorganization, (ii) the debtor s failure or - -

14 Main Document Page of () -00 ability to satisfy postpetition obligations, (iii) the nature of the interest at stake, (iv) the balance of hurt to the litigants and the good to be achieved, (v) whether the debtor has had sufficient time to appraise its financial situation and the potential value of its assets in formulating a plan, (vi) the safeguards afforded the litigants, (vii) the damages the non-debtor will suffer beyond compensation available under the Bankruptcy Code, (viii) whether there is a need for judicial determination as to whether an executory contract exists, (ix) whether a debtor s exclusive period to file a plan and solicit acceptances thereof has been terminated, (x) whether the action to be taken is in derogation of Congress scheme, and (xi) the purpose of chapter, which is to permit successful rehabilitation. In re Dana Corp., 0 B.R., (Bankr. S.D.N.Y. 0). No one factor is controlling and the analysis is conducted on a case-by-case basis.. Where a debtor is current in its postpetition obligations on an executory contract, courts have been reluctant to compel assumption or rejection earlier than the normal deadline of confirmation. See Physician Health, B.R. at ; Whitcomb & Keller, F.d at ; In re Wheeling-Pittsburgh Steel Corp., B.R., (Bankr. W.D. Pa. ) (finding it significant that [the debtor] is not in postpetition default of the executory contract at issue); In re New York Deli, Ltd., B.R., 0 (Bankr. D. Haw. ) (declining to shorten deadline for assumption or rejection based in part on finding that debtor was paying rent postpetition). In this case, as noted in the Carl James Declaration, while O Connor has not yet been invoiced by Stanford for any amounts due under the Affiliation Agreement postpetition, O Connor is prepared to pay any such amounts due in the ordinary course. (James Decl., at, lines -). The Proposed Accelerated Time Frame For the Debtors To Assume Or Reject Is Not Warranted And It is in Contravention Of The Statute.. An application of the above standards militates against granting of the relief requested for at least three reasons. First, the Motion was filed less than a month of the commencement of these cases, and just four days before the Debtors filed the Bidding Procedures - -

15 Main Document Page of () -00 Motion. This is not a case where Debtors have been dilatory in seeking a solution to address their distressed financial situation. The Debtors are currently in the process of actively marketing their assets with the intent of finding one or more purchasers for all of their operating hospitals, including O Connor and obtaining overbids if possible. O Connor s decision to assume or reject is tied to the sale process. Third, the Debtors have not been allowed a reasonable time to decide whether to assume or reject contracts, including the Agreement, and they are entitled to a reasonable opportunity to review their options and to consult with the Creditors Committee and their financial advisors. Four weeks or even two months into the case is not a reasonable time in this complex situation to make such determinations, where the Debtor s operations lose money and the contract in question may not be critical to a Buyer s successful operation of the hospital. Based on the foregoing, O Connor should not be rushed to make what may turn out to be an improvident decision, particularly given the fact that the auction of O Connor s assets is likely to take place in two or three weeks after November,.. A balancing of the interests of other creditors also requires that the Debtors not be pressured into favoring Stanford s claims or being rushed to assume or reject the Agreement before Debtors know who the successful bidder will be and what the terms of a final sale will provide as to payment of cure costs.. Stanford admittedly has until January, to make determinations on offers to be made to physician trainees. In addition, Stanford is preparing for the possibility that it may have to find replacement spots for any physicians who accept their offers if the O Connor program is not continued post sale. It is likely that this will not be necessary. The Debtors Bidding Motion sets out a fairly tight schedule for approval of a final sale transaction that will provide certainty to Stanford of who the new owner will be and whether it will assume the Affiliation Agreement and provide assurance of future performance of the Agreement. It would - -

16 Main Document Page of () -00 be wasteful for the estate of O Connor to assume a contract, pay cure costs only to find that the successful bidder will not take an assignment of such contract. Such a result would also provide little comfort to Stanford if its goal is to find a financially stable hospital for its current and future program participants.. Stanford s further argument, that the Debtors time to assume or reject should be circumvented because it does not know if the Debtors will make postpetition payments required under the Agreement, is without merit. The Debtors have obtained DIP financing and have the ability to make any postpetition payments that may be required and which are not disputed. In fact Stanford has not yet invoiced O Connor for postpetition amounts, but as indicated in the Carl James Declaration, O Connor is prepared to make such payments in the ordinary course upon invoicing by Stanford. (James Decl., at, lines -).. Finally, Stanford s argument that assumption is the obvious option because the Agreement is economically beneficial to O Connor is not so obvious. As indicated in the declaration of Carl James, the CFO of O Connor, current estimates for indicate that the total costs of the program are $,,.00, representing an estimated loss of $,0,.00 to O Connor for. (James Decl., at, lines -).. The Bankruptcy Code s policy of giving Debtors sufficient time to determine which contracts to assume are best served by giving O Connor additional time to determine whether assumption is in the best interest of its estate. It is quite possible that the successful bidder will assume the Agreement, but it is in both parties interest to wait for the results of the bidding process. Accordingly, the Debtors should be afforded the statutory timeframe to assume or reject the Agreement. Stanford s motion should be denied. - -

17 Main Document Page of IV. CONCLUSION WHEREFORE, the Debtors respectfully request that this Court (i) deny the Motion, and (ii) grant such other and further relief as the Court deems just and proper under the circumstances. () -00 Dated: October, SAMUEL R. MAIZEL TANIA M. MOYRON By /s/ Tania M. Moyron Tania M. Moyron Proposed Attorneys for the Chapter Debtors and Debtors In Possession - -

18 Main Document Page of () -00 DECLARATION OF CARL JAMES I, Carl James hereby declare and state as follows:. I currently serve as Chief Financial Officer for O Connor Hospital. I have been in my current role at O Connor Hospital since February and have been in healthcare finance for over years.. I have a Bachelor s degree in accounting and finance from Southern New Hampshire University, and a Master s degree in business administration from California State University.. Prior to my current position, I was the Regional Assistant Chief Financial Officer for O Connor Hospital and St. Louise Regional Hospital and before that, I was Regional Director for Community Health Systems-Patient Financial Services and Controller for Community Health Systems - Watsonville Community Hospital.. I provide this declaration in support of the Debtors Opposition To Motion Of Stanford Health Care ( Stanford ) To Assume Or Reject Health Services Affiliation Agreement On An Expedited Basis. Except as otherwise indicated herein, this Declaration is based upon my personal knowledge, my review of relevant documents, information provided to me by employees of O Connor and/or its affiliated Debtors or my opinion based upon my experience, knowledge, and information concerning the Debtors operations and the healthcare industry. If called upon to testify, I would testify competently to the facts set forth in this Declaration.. O Connor and Stanford are parties to an Affiliation Agreement, dated as of July, (the Agreement ). The Affiliation Agreement provides for certain physicians-in-training, called residents and fellows, to receive their training at O Connor. The residents and fellows are paid by their school, Stanford, which in turn is reimbursed by O Connor. The Agreement provides for Stanford to be responsible for overall administration, control and management of a - -

19 Main Document Page of () -00 program (the Program ), which provides training at O Connor for residents and fellows that are accredited by the Accreditation Council for Graduate Medical Education.. Under the Agreement, trainees are employees of Stanford and Stanford is responsible for the employment benefits and salaries of such trainees. O Connor is required to reimburse Stanford for the amount of such salaries and benefits paid by Stanford to trainees for the time the trainees are on rotation at O Connor. O Connor is also responsible for the payment of all costs and fees associated with the recruitment of trainees, all costs and fees associated with the Department of Family Medicine Retreats (as defined in the Agreement), and any other costs and fees not assumed by Stanford under Sections.,. and. of the Agreement. A copy of the Agreement is attached as Exhibit A hereto.. The Centers for Medicare & Medicaid Services ( CMS ) provides funding to O Connor Hospital for medical education; however, this funding does not fully cover the costs of the Program. CMS reimburses O Connor Hospital (according to CMS s regulations) for some of the costs incurred training the Trainees. CMS payments are O Connor s source of funding for O Connor Hospital to reimburse Stanford for the salary and benefits Stanford provides to the Trainees at O Connor Hospital. There are two types of payments CMS makes to O Connor Hospital: direct graduate medical education ( DGME ) payments and indirect medical education ( IME ) payments.. The Fiscal Year Medicare Cost Report has not been completed, but it is in process by the Verity Revenue Management Team. Based on the projected information, O Connor Hospital s Fiscal Year IME and DGME income from Medicare will be $,,0.00. The costs associated with the program include Medical Administration and Program Fees of $,,.00, invoiced Family Residency Salaries of $,,.0, $,.00 in salary and wages paid directly through O Connor Hospital, Insurance - -

20 Main Document Page of

21 Main Document Page of Exhibit A () -00

22 Main Document Page of () -00

23 Main Document Page of () -00

24 Main Document Page of () -00

25 Main Document Page of () -00

26 Main Document Page of () -00

27 Main Document Page of () -00

28 Main Document Page of () -00

29 Main Document Page of () -00

30 Main Document Page 0 of () -00

31 Main Document Page of () -00

32 Main Document Page of () -00

33 Main Document Page of () -00

34 Main Document Page of () -00