HEALTH CARE BASICS FOR BANKRUPTCY LAWYERS

1. Can the debtor use the threat of liquidation and termination of business operations in order to obtain
2. some concessions from the landlord?
1. Is such a threat credible, in light of the cost of closing an operating hospital and the debtor's duty to conserve funds of the estate for the benefit of creditors?
2. Can the tenant obtain the necessary licenses, contracts and certificates and capital necessary to equip a new facility and begin operations at another location upon termination of the old lease?

B. Conditions Under Which a Health Care Building Lease Need Not be Assumed Within 60 Days of the Commencement of the Bankruptcy Proceeding

Under 11 U.S.C. § 365(d)(4), a lease of non-residential real property must be assumed or rejected within 60 days of the commencement of the bankruptcy case. However, not all hospital leases are leases of nonresidential real property. For instance, hospitals for the commercial residential care of elderly persons may be considered residential leases.

It is also possible that section 365(d)(4) would not apply because the lease is not a lease. For instance, the lease could be recharacterized as a mortgage, or it may be found that the contract between the hospital and the owner of the building was to provide medical services and not for a lease of a structure.

C. Assumption of a Lease that was Assigned Pre-Petition

Multi-corporate medical service organizations which operate several hospitals usually operate each hospital through a separate subsidiary or affiliate for a multitude of business and legal reasons. In the event a bankruptcy reorganization proceeding becomes necessary, the parent corporation and its subsidiaries will have to decide which entities must file a proceeding in order to assume defaulted real estate leases. For instance, if several subsidiaries lease hospital buildings from a single lessor, each lease may be signed by the parent and the subsidiary as lessees (this would not be unusual, if all of the leases are governed by a master lease agreement, with amendments for each leased building); or the lease may have been originally signed by the parent corporation which later assigned the lease to its subsidiary. Depending upon the interest in the leased premises retained by the parent corporation, it may not be necessary for the subsidiary to file a bankruptcy proceeding in order to assume the defaulted lease.

D. Enforceability of Cross-Default Provisions in Multiple Leases

Corporations that operate several hospitals in buildings leased from a single landlord usually have real estate leases with cross-default provisions. Therefore, if a hospital files a reorganization proceeding, it may not be able to assume its lease without curing the defaults of all other related leases. Since section 365(b)(1) provides that a lease may not be assumed by the debtor unless the debtor cures or provides adequate assurance that it will promptly cure all outstanding defaults, an enforceable cross-default provision may make it impossible or uneconomical to assume an otherwise valuable lease. To determine whether the cross-default provisions will prevent the assumption of a single lease without curing defaults on all leases, the courts initially determine whether the manly leases azre several single leases or constitute one lease.

Bankruptcy courts have shown a reluctance to enforce cross-default provisions despite most courts' recognition that assumption of a contract requires the debtor to accept its burdens with its benefits. The case law