doc 292-debtors opposition to automatic stay

7/31/2019 Doc 292-Debtors Opposition to Automatic Stay

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UNITED STATES BANKRUPTCY COURT

FOR THE MIDDLE DISTRICT OF TENNESSEE

NASHVILLE DIVISION

________________________________________________)

IN RE: ) Chapter 11

) Case No. 12-01573

CHURCH STREET HEALTH MANAGEMENT, LLC, ) Judge Lundin

et al., ) (Jointly Administered)

)

) Hearing Date: May 1, 2012, 8:30 AMDebtors. ) Objection Deadline: April 24, 2012

________________________________________________)

DEBTORS OPPOSITION TO

MOTION FOR RELIEF FROM THE AUTOMATIC STAY

Robert J. Walker (#2498)J. Mark Tipps (#11710)

Jason W. Callen (#26225)

WALKER, TIPPS & MALONE, PLC2300 One Nashville Place

150 Fourth Avenue, NorthNashville, TN 37219-2424

Telephone: 615. 313.6000

Email:[email protected]

Counsel for the Debtors

-and-

Kenneth S. Leonetti, Esq.*

FOLEY HOAG LLPSeaport World Trade Center West

155 Seaport Boulevard

Boston, MA 02210-2600Telephone: 617.832.1000

Facsimile: 617.832.7000

Email: [email protected]

Special Litigation Counsel to the Debtors

*Admitted Pro Hac Vice

Case 3:12-bk-01573 Doc 292 Filed 04/24/12 Entered 04/24/12 19:53:24 Desc MainDocument Page 1 of 29


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TABLE OF CONTENTS

TABLE OF AUTHORITIES .......................................................................................................... iiI. PRELIMINARY STATEMENT ........................................................................................ 1II. BACKGROUND ................................................................................................................ 3III. ARGUMENT ...................................................................................................................... 9

A. Lifting the Automatic Stay Would Interfere With the Debtors Efforts toAchieve the Primary Purposes of These Chapter 11 Cases. ....................................9

B. Lifting the Automatic Stay Could Deplete Essential Estate Assets to theDetriment of Other Patient Litigation Claimants. ..................................................11

C. The New York Plaintiffs Have Failed to Establish Cause to Lift theAutomatic Stay.......................................................................................................15

IV. CONCLUSION ................................................................................................................. 23



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TABLE OF AUTHORITIES

Cases

ACandS, Inc. v. Travelers Casualty & Surety Co.,435 F.3d 252 (3d Cir. 2006)..................................................................................................... 13

A.H. Robins Co., Inc. v. Piccinin,

788 F.2d 994 (4th Cir.1986) ............................................................................ 11, 12, 13, 14, 15Beiger v. United States,

496 U.S. 53 (1990) ............................................................................................................. 20, 21

In re 15375 Memorial Corp.,381 B.R. 652 (Bankr. D. Del. 2008) ......................................................................................... 20

In re Adelphia Communications Corp.,

298 B.R. 49 (S.D.N.Y. 2003) ................................................................................................... 11In re AP Industries Inc.,

117 B.R. 789 (Bankr. S.D.N.Y. 1990) ..................................................................................... 12

In re Cicale,

2007 WL 1893301 (Bankr. S.D.N.Y. June 29, 2007) ............................................................... 18In re Dow Corning Corp.,

280 F.3d 648 (6th Cir. 2002) ..................................................................................................... 9

In re Eagle-Picher Industries, Inc.,963 F.2d 855 (6th Cir. 1992) ................................................................................................... 11

In re G.S. Distribution, Inc.,

331 B.R. 552 (Bankr. S.D.N.Y. 2005) ..................................................................................... 20In re Garzoni,

2002 WL 962154 at *2 (6th Cir. May 8, 2002) ....................................................................... 16

In re Graham Square, Inc.,

126 F.3d 823 (6th Cir. 1997) ................................................................................................... 12In re Granite Partners, L.P.,

194 B.R. 318 (Bankr. S.D.N.Y. 1996) ..................................................................................... 11

In re Hollys, Inc.,

40 B.R. 643 (Bankr. W.D. Mich. 1992) ................................................................................... 16

In re Johns Manville Corp.,33 B.R. 254 (S.D.N.Y. 1983) ................................................................................................... 13

In re Johns Manville Corp.,

40 B.R. 219 (S.D.N.Y. 1984) ................................................................................................... 13In re Johns-Manville Corp.,

801 F.2d 60 (2d Cir. 1986)....................................................................................................... 10

In re Keene Corp.,171 B.R. 180 (Bankr. S.D.N.Y. 1994) ..................................................................................... 16

In re Laguna Associates Ltd. Pship,

30 F.3d 734 (6th Cir. 1994) ............................................................................................... 10, 15

In re Lee,530 F.3d 458 (6th Cir. 2008) ................................................................................................... 21

In re Loudon,

284 B.R. 106 (8th Cir. B.A.P. 2002)........................................................................................ 20



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In re Mazzeo,167 F.3d 139 (2d Cir. 1999)..................................................................................................... 16

In re Minoco Group of Cos., Ltd.,

799 F.2d 517 (9th Cir. 1986) ................................................................................................... 12In re Pioneer Commercial Funding Corp.,

114 B.R. 45 (Bankr. S.D.N.Y. 1990) ....................................................................................... 16In re Plastech Engrd Prods., Inc.,382 B.R. 90 (Bankr. E.D. Mich. 2008) .................................................................................... 16

In re Poissant,

405 B.R. 267 (Bankr. N.D. Ohio 2009) ................................................................................... 16

In re R.J. Groover Construction, LLC,411 B.R. 460 (Bankr. N.D. Ga. 2008) ...................................................................................... 20

In re Republic Techs. International, LLC,

275 B.R. 508 (N.D. Ohio 2002) .......................................................................................... 11, 12In re Sonnax Industries, Inc.,

907 F.2d 1280 (2d Cir. 1990)....................................................................................... 15, 16, 19

In re Sonnax Industries, Inc.,99 B.R. 591 (D. Vt. 1989) ........................................................................................................ 16

In re St. Clares Hospital & Health Ctr.,

934 F2d 15 (2d Cir. 1991).................................................................................................. 12, 13In re Titan Energy, Inc.,

837 F.2d 325 (8th Cir. 1988) ................................................................................................... 13

In re Trailer Source, Inc.,

555 F.3d 231 (6th Cir. 2009) ................................................................................................... 15In re Vitek, Inc.,

51 F.3d 530 (5th Cir. 1995) ..................................................................................................... 12In re White Motor Credit,

761 F.2d 270 (6th Cir. 1985) ................................................................................................... 14

In re Wilson,116 F.3d 87 (3d Cir. 1997)....................................................................................................... 15

In re Winshall Settlors Trust,

758 F.2d 1136 (6th Cir. 1985) ................................................................................................. 10In re Youngstown Osteopathic Hospital Assn,

271 B.R. 544 (Bankr. N.D. Ohio 2002) ................................................................................... 13

MacArthur Co. v. Johns-Manville Corp.,837 F.2d 89 (2d Cir. 1988)........... 11

Matter of Holtkamp,

669 F.2d 505 (7th Cir.1982) .................................................................................................... 12

Midatlantic National Bank v. New Jersey Department of Envtl Protection,474 U.S. 494 (1986) ................................................................................................................. 10

Scrima v. The DeVries Agency, Inc.,

103 B.R. 132 (W.D. Mich. 1989) ............................................................................................ 11Tringali v. Hathaway Machinery Co., Inc.,

796 F.2d 553 (1st Cir. 1986) .................................................................................................... 13

United States v. Whiting Pools, Inc.,462 U.S. 198 (1983) ................................................................................................................. 12



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Statutes

11 U.S.C. 105(a) ......................................................................................................................... 11

11 U.S.C. 362(a)(1) ................................................................................................................ 9, 10

11 U.S.C. 362(a)(3) ........................................................................................................ 11, 12, 1511 U.S.C. 362(d)(1) .................................................................................................................... 15

11 U.S.C. 362(g)(2) .................................................................................................................... 16

11 U.S.C. 541(a) ......................................................................................................................... 1228 U.S.C. 157(b)(5) ...................................................................................................................... 18

N.Y. Jud. Law 140-b .................................................................................................................. 18

Legislative Materials

H.R. Rep. No. 95-595,reprinted in 1978 U.S.C.C.A.N. 5963 ...................................................... 10

Other Authorities

Collier on Bankruptcy, Alan N. Resnick & Henry J. Sommer eds., 16th ed. (2010) ........... 13, 14



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Church Street Health Management, LLC (Church Street) and certain of its subsidiaries

and affiliates, as debtors and debtors in possession (collectively, the Debtors or the

Company and each, a Debtor)1 in the above-captioned chapter 11 cases (the Chapter 11

Cases), hereby submit this opposition to the Motion For Relief From The Automatic Stay (the

Motion) filed on behalf of thirty-one plaintiffs (the New York Plaintiffs) in four personal

injury lawsuits commenced in the Supreme Court of New York collectively styled In re Small

Smiles Litigation, Index No. 2011-2128 (the New York Lawsuits), in which Debtors Church

Street and FORBA NY, LLC (FORBA NY) are named as lead defendants. In support hereof,

the Debtors respectfully state as follows:

I. PRELIMINARY STATEMENTThe Motion should be denied both because it is premature and is at odds with the

fundamental purpose of the automatic stay that gives debtors a breathing spell at the outset of a

bankruptcy case and preserves estate assets for the benefit of all creditors. A mere six weeks into

these Chapter 11 Cases, the New York Plaintiffs seek to revive their lawsuits against the

Company and its affiliated dental centers, at a time when the Debtors limited resources need to

be devoted to the immediate tasks of facilitating the proposed sale of substantially all of their

assets, formulating a Chapter 11 plan and working to achieve a comprehensive resolution of all

potential plaintiffs claims, not just those of the New York Plaintiffs, but also the claims of the

forty-four plaintiffs in personal injury lawsuits filed in Oklahoma (the Oklahoma Lawsuit) and

1The Debtors (with the last four digits of each Debtors federal tax identification number and chapter 11 case

number), are: Church Street Health Management, LLC (2335; Case No. 12-01573), Small Smiles Holding

Company (4993; Case No. 12-01574), FORBA NY, LLC (8013; Case No. 12-01575), FORBA Services, Inc. (6506;

Case No. 12-01574), EEHC, Inc. (4973; Case No. 12-01577).



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Ohio (the Ohio Lawsuit).2

As a result, the New York Plaintiffs cannot establish cause

sufficient to terminate the stay at this juncture, nor have they articulated any special facts or

circumstances warranting such relief. To the contrary, the New York Lawsuits are not close to

being trial ready, and allowing these cases to proceed would impose an extreme burden on the

Debtors and risks depleting essential estate assets, to wit, the proceeds of the Debtors liability

insurance policies, to the detriment of other potential claimants in the Patient Litigation.

Moreover, permitting the New York Lawsuits to go forward at present could jeopardize

the Debtors efforts to achieve a global resolution of the litigations that helped precipitate this

bankruptcy case. The Debtors have successfully convinced all of the key constituencies to

participate in a mediation (the Mediation) designed to end both the Patient Litigation and the

Debtors disputes with their insurance carriers and agents, that would result in a mechanism for

the filing, resolution and payment of Patient Litigation claims. The goal of the Mediation and

one of the key objectives of these Chapter 11 Cases is to achieve a global resolution of all

active and potential Patient Litigation, rather than being forced to litigate such claims in a

piecemeal, ad hoc manner in courts across the country. If allowed to proceed with the New

York Lawsuits, the New York Plaintiffs would frustrate the parties ongoing efforts to resolve

the Patient Litigation in the context of an orderly bankruptcy proceeding.

Further, should the New York Plaintiffs be permitted to proceed with their litigation at

this juncture, such an action could undermine the Bankruptcy Codes principle of ratable

distribution among similarly situated creditors. The Debtors liability insurance policies, and the

proceeds therefrom, are assets of the estate. Because the number and amount of potential

2 The New York Lawsuits, the Oklahoma Lawsuit, the Ohio Lawsuit, along with any anticipated future patient

personal injury claims are collectively referred to herein as the Patient Litigation.



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Patient Litigation claims is currently undetermined, and because the Debtors insurance carrier

disputes the amount and validity of possible insurance coverage, it is impossible to determine at

present whether there will be sufficient insurance to satisfy all potential Patient Litigation claims.

Accordingly, payment of any judgment in favor of the New York Plaintiffs could diminish estate

assets to the detriment of other Patient Litigation claimants. By proceeding with the New York

Lawsuits, therefore, the New York Plaintiffs not only would hinder comprehensive settlement

efforts, they also could prejudice other potential tort claimants.

In sum, the burden imposed on the Debtors in terms of time, financial resources and

attention necessary to defend the New York Lawsuits, and the potential for inequitable treatment

of similarly situated Patient Litigation claimants, far outweigh any potential gain to the New

York Plaintiffs that would result from permitting the New York Lawsuits to proceed at this

juncture in the case. Accordingly, the Motion should be denied.

II. BACKGROUND31. The Debtors are parties to a Management Service Agreement (MSA) with each

non-debtor dental center for which the Debtors provide management services (collectively, the

Dental Centers). Pursuant to each MSA, the Debtors provide the Dental Centers with

management services such as billing and collection, bookkeeping, accounting and tax services,

dentist and staff recruitment, payroll services, human resources, information technology support,

equipment and supplies procurement, leasing, repairs and capital improvements, and assistance

with compliance, legal issues, government affairs, and licensing and permitting.

3The factual background relating to the Debtors commencement of these Chapter 11 Cases is set forth in detail in

the Affidavit of Martin J. McGahan, the Chief Restructuring Officer of Church Street Health Management, LLC, in

Support of Chapter 11 Petitions and First Day Pleadings, filed on February 21, 2012 and incorporated herein by

reference.



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The Patient Litigation

2. In or around 2007, the Office of Inspector General of the U.S. Department of Healthand Human Services (OIG) and the United States Department of Justice (the DOJ), began

investigations of the Company and the Dental Centers. A number of state Attorneys General

also commenced parallel state investigations of the Company and the Dental Centers.

Additionally, the New York State Office of Medicaid Inspector General (OMIG) commenced

an investigation. (The OIG, DOJ, state Attorneys General and OMIG investigations,

collectively, the Investigations.)

3. The cumulative effect of the Investigations along with certain negative news storiesplaced an extraordinary financial burden on the Company. In January 2010, without admitting

any wrongdoing, the Company entered into a series of settlement agreements to bring an end to

the Investigations (the Settlement Agreements).

4. Not surprisingly, the combination of adverse publicity and the Settlement Agreementsdrew the attention of the plaintiffs bar. Almost immediately after the Settlement Agreements

were executed, trial lawyers began soliciting patients of the Dental Centers to become plaintiffs

in lawsuits asserting a variety of tort and fraud claims against the Company, certain Dental

Centers and certain individual dentists employed by the Dental Centers (the Dentists). Since

January 2010, approximately eleven lawsuits on behalf of over seventy-five plaintiffs have been

filed in primarily three states, New York, Ohio and Oklahoma. As of the commencement of

these Chapter 11 Cases, there were thirty-one individual plaintiffs in the New York Lawsuits,

and forty-four plaintiffs in the Oklahoma Lawsuit and the Ohio Lawsuit.

5. A previously-filed malpractice case in New Mexico was expanded to add fraudclaims against the Company similar to those asserted in the New York, Ohio and Oklahoma

Lawsuits. That case went to trial in August 2011 and resulted in a jury verdict in favor of the



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Company and the applicable Dental Centers and Dentists. Not to be deterred, the plaintiffs

attorneys have told the Debtors that they represent numerous former patients and have requested

the charts of those patients, presumably in an effort to file additional lawsuits against the

Company, the Dental Centers and the Dentists. Specifically, the attorneys for the New York

Plaintiffs requested approximately 750 individual patient charts and claim to represent

approximately 500 patients. Similarly, counsel for plaintiffs in the Oklahoma Lawsuit requested

approximately 400 individual patient charts and counsel for the plaintiffs in the Ohio Lawsuit

requested approximately 100 patient charts. Based on the foregoing, the Debtors estimate that

there could be over 1,000 additional Patient Litigation claimants, and possibly many more.

6. The New York Lawsuits consist of four cases commenced in four counties in NewYork in 2011. A copy of one of the four nearly identical Complaints filed in the New York

Lawsuits is attached hereto as Exhibit A. These cases were brought against two debtor entities

Church Street and FORBA NY and forty-three non-debtor entities, consisting of four New

York Dental Centers and thirty-nine individual Dentists. The cases were consolidated for pre-

trial purposes, but eventually will be tried separately.

7. As the New York Plaintiffs acknowledge, as of the Petition Date (defined below),none of the parties had responded to any discovery requests. See Memorandum in Support of

Motion For Relief From the Automatic Stay (Brief), p. 9. Although there are multiple

defendants, the Debtors are in possession of the vast majority of the documentary evidence and

are responsible for coordinating both the defense of the cases and the defendants discovery

responses. As such, the Debtors overwhelmingly would bear the defendants burden in

discovery. Indeed, the New York Supreme Court already has ordered the Debtors to produce

documents that exceed one million pages.



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8. As of the Petition Date, no depositions have been taken in the New York Lawsuits.The Debtors anticipate that there will be well over 100 depositions in the New York Lawsuits,

including plaintiffs, guardians, other adults who accompanied plaintiffs to appointments, and the

defendants (including representatives of the Debtors and the Dental Centers, and the individual

Dentists). Given the nature of the plaintiffs claims, the defendants also will seek to obtain

IMEs, or independent medical examinations, for each plaintiff. Following discovery, motion

practice would ensue in advance of the trials, including filing and arguing of dispositive motions.

In other words, there are substantial pretrial proceedings that need to occur before the New York

Lawsuits would be ready for trial.

The Debtors Liability Insurance and the Coverage Litigation

9. The Company, the Dental Centers and the Dentists are beneficiaries of certainDentists Liability Policies (the National Union Policies) purchased by the Company and issued

by National Fire Insurance Company of Pittsburgh, PA (National Union). The National Union

Policies cover the Debtors and the Dental Centers (so called Entities Policies), and individual

Dentists (so called Individual Dentist Policies). On each of the National Union Policies

Declarations, Debtor Small Smiles Holding Company, LLC is identified as the First Named

Insured. Each of the National Union Policies, subject to certain conditions, exclusions and

limitations, generally affords professional liability coverage, plus coverage of certain defense

costs, to that Policys insureds for covered damages arising from a qualifying dental

incident. Most of the defendants in the New York Lawsuits are beneficiaries of the National

Union Policies, although a few individual Dentist defendants are covered by insurance policies

issued by other carriers.



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10.The Company tendered the Patient Litigation to National Union for defense andindemnity under the National Union Policies. National Union denied coverage and commenced

a lawsuit in 2010 against the Company in the United States District Court for the Middle District

of Tennessee seeking rescission and reformation of the National Union Policies on a variety of

grounds (the Coverage Litigation). National Union also disputed the aggregate policy limits

under certain of the policies. The Company brought counterclaims against National Union,

alleging, among other things, bad faith refusal to honor the policies. The Company also

impleaded as a third party defendant Affinity Insurance Services, Inc. (Affinity), the insurance

broker that placed the National Union Policies with the Company. After some preliminary

litigation and subsequent negotiations, the parties jointly moved to administratively close the

Coverage Litigation, and on October 4, 2011, the District Court entered an order administratively

closing the case without prejudice, with any party having the right to petition to reopen the

Coverage Litigation on 30 days written notice.

The Chapter 11 Cases

11.On February 20, 2012 and continuing into February 21, 2012 (the Petition Date),each of the Debtors filed a voluntary petition for relief with the Court under chapter 11 of the

Bankruptcy Code. The Debtors are operating their businesses and managing their property as

debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No request

for the appointment of a trustee or examiner has been made in the Chapter 11 Cases. An official

committee of unsecured creditors (the Committee) has been appointed by the Office of the

United States Trustee for the Middle District of Tennessee in these administratively consolidated

cases.



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12.The primary purpose of the filing was twofold. First, as detailed in the Debtors firstday pleadings, due to the Debtors financial condition, the Debtors are seeking to sell

substantially all of their assets under section 363 of the Bankruptcy Code. To this end, on March

2, 2012, the Debtors filed a sale procedures motion, seeking authority to sell their assets,

requesting approval of bid procedures and requesting certain bid protections for the stalking

horse bidder (Docket No. 106, the Sale Procedures Motion). On March 15, 2012, this Court

entered an order granting the Sales Procedures Motion. (Docket No. 188, the Sale Procedures

Order). The Sales Procedures Order, as subsequently amended, sets May 4, 2012 as the

deadline to submit qualified bids, schedules the auction for May 11, 2012, and schedules a

hearing on an order approving the sale for May 22, 2012.

13.Since the Petition Date, the Debtors have worked diligently to identify and solicit bidsfrom potential qualifying bidders in advance of the bid deadline and auction. The Debtors also

have worked with the stalking horse bidder to analyze the numerous executory contracts and

unexpired leases to be included in the sale, and to prepare and serve a schedule of contracts

listing executory contracts and unexpired leases to be assigned, together with cure amounts.

14.The second purpose of these Chapter 11 Cases is to achieve a global resolution of thePatient Litigation and resolve the dispute with National Union over insurance coverage for those

claims. Resolution of both disputes is critical to the ability of the Debtors and the Dental Centers

to continue as viable business entities and of paramount importance to any buyer of the Debtors

business. Given the individual character of each plaintiffs claim, resolving the Patient

Litigation as a conventional class action would be difficult. Nevertheless, the bankruptcy

process gives the Debtors the ability to centralize claims, aggregate assets to satisfy those claims,

implement a procedure for resolving claims, and provide for releases of both Debtor and non-



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debtor parties. See, e.g., In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002). As such, the

confluence of events, including the Debtors financial situation and the motivation of the insurer

and plaintiff litigants to attempt to resolve matters before expending significant additional

litigation costs, creates a one-time opportunity for a potential settlement.

15.Since the first weeks of these Chapter 11 Cases, the Debtors and their speciallitigation counsel have engaged with plaintiffs counsel in the Patient Litigation and counsel to

National Union and Affinity in an effort to convene a formal mediation among the various

constituencies. Indeed, about two weeks ago, the Debtors, counsel representing the current

claimants in the Patient Litigation, National Union, Affinity and some of the Debtors other

insurance carriers agreed to participate in the Mediation, with the goal of achieving a global

settlement of the Patient and Coverage Litigations. Shortly after the New York Plaintiffs filed

the Motion, the parties selected Peter H. Woodin, Esq. of JAMS to serve as the mediator. Mr.

Woodin has extensive experience mediating and settling complex multi-party tort litigation,

including in the bankruptcy context. It is anticipated that the formal part of the Mediation will

take place in late May or June, although Mr. Woodin has already begun in earnest discussions

with the parties.

III. ARGUMENTA. Lifting the Automatic Stay Would Interfere With the Debtors Efforts to

Achieve the Primary Purposes of These Chapter 11 Cases.

Section 362(a)(1) of the Bankruptcy Code provides that

. . . [A] petition filed under section 301, 302 or 303 of this title . . . operates as astay, applicable to all entities, of (1) the commencement or continuation,

including the issuance or employment of process, of a judicial, administrative, or

other action or proceeding against the debtor that was or could have been

commenced before the commencement of the case under this title, or to recover aclaim against the debtor that arose before the commencement of the case under

this title.



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11 U.S.C. 362(a)(1).

The automatic stay is among the most important protections for a debtor under the

Bankruptcy Code, if not the single most important one. See, e.g., Midatlantic Natl Bank v. New

Jersey Dept of Envtl Protection, 474 U.S. 494, 503 (1986) (The automatic stay provision of

the Bankruptcy Code . . . has been described as one of the fundamental debtor protections

provided by the bankruptcy laws.) (citing H.R. Rep. No. 95-595, at 340 (1977), reprinted in

1978 U.S.C.C.A.N. 5963, 6297) (internal quotations omitted). The automatic stay provides the

debtor with a breathing spell after the commencement of a chapter 11 case, shielding it from

creditor harassment at a time when the debtors personnel should be focusing on restructuring

efforts. In re Johns-Manville Corp., 801 F.2d 60, 64 (2d Cir. 1986); see also In re Laguna

Assocs. Ltd. Pship, 30 F.3d 734, 737 (6th Cir. 1994) (the purpose the automatic stay is to assist

financially distressed business enterprises by providing them with breathing space in which to

return to a viable state.) (quoting In re Winshall Settlors Trust, 758 F.2d 1136, 1137 (6th Cir.

1985)).

By moving to lift the stay at the moment when the Debtors are working assiduously to

consummate the sale of their assets and just weeks before commencing the Mediation, the New

York Plaintiffs seek relief that would be incompatible with this concept. Dissolving or

modifying the stay would force the Debtors to redirect their efforts toward producing substantial

numbers of documents, responding to other written discovery, taking and defending numerous

depositions, and preparing for individual trials in cases that likely would not be trial ready for

many months, if not years. Far from providing the Debtors breathing space in which to return



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to a viable state, id., the relief the New York Plaintiffs seek would jeopardize the key purposes

of these Chapter 11 Cases. For this reason alone, the Motion should be denied. 4

B. Lifting the Automatic Stay Could Deplete Essential Estate Assets to theDetriment of Other Patient Litigation Claimants.

In addition to shielding the debtor from unwarranted interference, the automatic stay also

protects and preserves estate assets for the benefit of all creditors. See 11 U.S.C. 362(a)(3)

(automatically staying any act to obtain possession of property of the estate or of property from

the estate or to exercise control over property of the estate); A H. Robins Co., Inc. v. Piccinin,

788 F.2d 994, 998 (4th Cir.1986) (While section 362(a)(1) stays any proceeding commenced or

[that] could have been commenced against the debtor . . . [section 362(a)(3)] provides similar

relief against suits involving the possessions or custody of property of the debtor, irrespective of

whether the suits are against the debtor alone or others.); see also In re Republic Techs. Intl,

LLC, 275 B.R. 508, 512 (N.D. Ohio 2002); Scrima v. The DeVries Agency, Inc., 103 B.R. 132

(W.D. Mich. 1989). The automatic stay thus protect[s] the debtor from an uncontrollable

scramble for its assets in a number of uncoordinated proceedings in different courts, to preclude

one creditor from pursuing a remedy to the disadvantage of other creditors, and to provide the

debtor and its executives with a reasonable respite from protracted litigation, during which they

4 Because the Debtors are primarily responsible for the defense of the New York Lawsuits, even if the Debtors were

not named defendants, or if the New York Plaintiffs sought only to proceed against non-debtor defendants, the

Debtors respectfully submit that it would be appropriate for the Court to stay those proceedings pursuant to section

105(a) of the Bankruptcy Code, given the substantial interference with the Chapter 11 Cases that would result if the

New York Lawsuits were to go forward. See, e.g., In re Eagle-Picher Indus., Inc., 963 F.2d 855, 860 (6th Cir. 1992)(staying state court action that would needlessly divert key employees from the debtors reorganization effort); see

also MacArthur Co. v. Johns-Manville Corp.837 F.2d 89, 93 (2d Cir. 1988) (section 105 has been construed

liberally to enjoin suits that might impede the reorganization process); In re Adelphia Communications Corp., 298

B.R. 49, 54 (S.D.N.Y. 2003) (It is well settled that bankruptcy courts, under [11 U.S.C. 105], may extend the

automatic stay to enjoin suits by third parties against third parties if they threaten to thwart or frustrate the debtors

reorganization efforts,) (quoting In re Granite Partners, L.P., 194 B.R. 318, 337 (Bankr. S.D.N.Y. 1996)).



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may have an opportunity to formulate a plan of reorganization for the debtor. A.H. Robins Co.,

Inc., 788 F.2d at 998 (citing Matter of Holtkamp, 669 F.2d 505, 508 (7th Cir.1982)); see also In

re AP Indus. Inc., 117 B.R. 789, 798 (Bankr. S.D.N.Y. 1990) (The automatic stay prevents

creditors from reaching the assets of the debtors estate piecemeal and preserves the debtors

estate so that all creditors and their claims can be assembled in the bankruptcy court for a single

organized proceeding.).

The New York Plaintiffs acknowledge that the automatic stay is intended to prevent a

prejudicial dissipation of a debtors assets. Brief, p. 11. They contend, however, that because

they will rely entirely on the proceeds from the Debtors applicable insurance policies to satisfy

any judgment obtained against [the Debtors], they are not seeking to recover anything directly

from the Debtors or the bankruptcy estates. Id. at 1-2. This is not a correct application of the

law since the National Union Policies and the proceeds of those policies are assets of the estate

entitled to protection under Section 362(a)(3).

Section 541(a) of the Bankruptcy Code defines property of a bankruptcy estate as all

legal or equitable interests of the debtor in property as of the commencement of the case. 11

U.S.C. 541(a). The scope of that definition is intended to be broad, In re Republic Techs.

Intl, LLC, 275 B.R. at 512 (citing United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n. 9

(1983)); see also In re Graham Square, Inc., 126 F.3d 823, 831 (6th Cir. 1997)), and an

overwhelming majority of courts have concluded that liability insurance policies fall within

541(a)(1)s definition of estate property. In re Vitek, Inc., 51 F.3d 530, 533 (5th Cir. 1995);

see also, e.g., In re Minoco Group of Cos., Ltd., 799 F.2d 517, 519 (9th Cir. 1986) (debtors

insurance policies met the fundamental test of whether they are property of the estate because

the debtors estate is worth more with them than without them); In re St. Clares Hosp. &



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Health Ctr., 934 F2d 15 (2d Cir. 1991); In re Titan Energy, Inc., 837 F.2d 325 (8th Cir. 1988);

Tringali v. Hathaway Mach. Co., Inc., 796 F.2d 553 (1st Cir. 1986). This is particularly true

here, where the Debtors various insurance policies are one of the few assets potentially available

to pay those unsecured creditors who have claims arising out of the Patient Litigation. Indeed, as

the Committee noted in its recently filed Rule 2004 motion seeking discovery from the Debtors,

the National Union Policies may be the only asset available for recovery by the largest

constituency of creditors represented by the Committee. See Docket No. 273, 5.

Because insurance policies and their proceeds are assets of a debtors estate, any

proceeding which could result in a judgment minimizing such assets should be stayed under

section 362(a)(3). As the Court of Appeals for the Fourth Circuit reasoned:

Under the weight of authority, insurance contracts have been said to be embraced

in [Section 541(a)s] definition of property. . . . . [A liability insurance policy]

is a valuable property of a debtor, particularly if the debtor is confronted with

substantial liability claims within the coverage of the policy in which case thepolicy may well be . . . the most important asset . . . of the debtors estate. Any

action in which the judgment may diminish this important asset isunquestionably subject to a stay under [11 U.S.C. 362(a)(3)].

A.H. Robins Co., Inc., 788 F.2d at 1001 (quoting In re Johns Manville Corp., 40 B.R. 219, 229

(S.D.N.Y. 1984) and In re Johns Manville Corp., 33 B.R. 254, 261 (S.D.N.Y. 1983)); see also

ACandS, Inc. v. Travelers Cas. & Sur. Co., 435 F.3d 252, 261 (3d Cir. 2006) (Alito, J.) (The

possession or control language of Section 362(a)(3) has consistently been interpreted to prevent

acts that diminish future recoveries from a debtors insurance policies.) (citations omitted); In re

Youngstown Osteopathic Hosp. Assn, 271 B.R. 544, 547-48 (Bankr. N.D. Ohio 2002) (The

prevailing view is that an insurance policy is property of the estate pursuant to 11 U.S.C.

541(a)(1) and protected by the automatic stay provision in 11 U.S.C. 362(a)(3).); 3 Collier

on Bankruptcy 362.07[3][a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (proceeds of

debtors insurance policies should be considered property of the estate . . . because there may be



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multiple claimants to the proceeds of the policy, and the proceeds may be insufficient to satisfy

all claimants. In such a case the bankruptcy court should be able to oversee the allocation of the

insufficient policy proceeds among the claimants.) (emphasis added).

The Court of Appeals for the Sixth Circuit applied the same logic in In re White Motor

Credit, 761 F.2d 270 (6th Cir. 1985). There, the Sixth Circuit held that the District Court did not

abuse its discretion in declining to exercise jurisdiction over numerous personal injury lawsuits

against the debtor. In that case, however, the parties agreed that the debtors products liability

insurance was adequate to cover all claims filed. The Sixth Circuit cautioned that had this not

been so, the result in that case would have been different:

Were it not for the fact that all parties are in agreement that the insurance

coverage is adequate to cover all filed claims, it would be necessary to liquidateall claims before any insurance was paid out; otherwise, some claimants would

receive an unequal portion of the insurance assets of the debtor.

Id. at 274. Analyzing White, the Fourth Circuit in A.H. Robins recognized, [i]t is obvious from

that statement that White actually sustains the result reached by us that, if the liability insurance

is inadequate to satisfy in full all claims under the insurance, the actions by claimants should be

stayed and the claims should be liquidated in the bankruptcy court. A.H. Robins Co., Inc.,

788 F.2d at 1002 n. 10 (quoting White, 761 F.2d at 274).

Here, as in A.H. Robins, the Debtors are confronted with substantial liability claims

within the coverage of [their liability] polic[ies]. Id. at 1001. Because the aggregate amount of

judgments in the Patient Litigation might exceed the total proceeds of the National Union

Policies, the New York Lawsuits constitute action[s] in which the judgment may diminish this

important asset of the Debtors estate, and therefore are unquestionably subject to a stay

under Section 362(a)(3). Id.



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C. The New York Plaintiffs Have Failed to Establish Cause to Lift theAutomatic Stay.

Section 362(d)(1) of the Bankruptcy Code provides that relief from the stay may be

granted only where the party seeking relief demonstrates cause. 11 U.S.C. 362(d)(1); In re

Trailer Source, Inc., 555 F.3d 231, 245 (6th Cir. 2009). Because section 362(d) does not define

cause, courts must determine whether discretionary relief is appropriate on a case-by-case

basis. In re Laguna Assocs. Ltd. Pship, 30 F.3d at 737; In re Wilson, 116 F.3d 87, 90 (3d Cir.

1997). The New York Plaintiffs rely on the test articulated in In re Sonnax Industries, Inc., 907

F.2d 1280, 1286 (2d Cir. 1990), in which the Second Circuit catalogued twelve factors (the

Sonnax Factors) to be considered and balanced when deciding whether the movants have

established sufficient cause to warrant lifting the stay:

1) Whether relief would result in a partial or complete resolution of the issues;2) The lack of any connection with or interference with the bankruptcy case;3) Whether the other proceeding involves the debtor as a fiduciary;4) Whether a specialized tribunal with the necessary expertise has been established to

hear the cause of action;

5) Whether the debtors insurer has assumed full responsibility for defending it;6) Whether the action primarily involves third parties;7) Whether litigation in another forum would prejudice the interests of other creditors;8) Whether the judgment claim arising from the other action is subject to equitable

subordination;

9) Whether the movants success in the other proceeding would result in a judicial lienavailable by the debtor;

10) The interests of judicial economy and the expeditious and economical resolution ofthe litigation;

11) Whether the parties are ready for trial in the other proceeding; and12) The impact of the stay on the parties and the balance of harms.



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Id. Not all of the Sonnax Factors are relevant in every case, and a court need not assign equal

weight to each factor. In re Mazzeo, 167 F.3d 139, 143 (2d Cir. 1999); In re Keene Corp., 171

B.R. 180, 183 (Bankr. S.D.N.Y. 1994). 5

While the debtor bears the ultimate burden of disproving the existence of cause, 11

U.S.C. 362(g)(2), the initial burden of proof is upon the movant . . . to support a motion . . .

for relief from stay [under section 362(d)(1)]. In re Poissant, 405 B.R. 267, 271 (Bankr. N.D.

Ohio 2009). Where the movant cannot make this initial showing, relief should be denied to the

[movant] without requiring the Debtor to make any showing that [it] is entitled to continued

protection of the automatic stay. Id. (citing Sonnax); see also In re Hollys, Inc., 40 B.R. 643,

683 (Bankr. W.D. Mich. 1992) (Section 362(d)(1) requires an initial showing of cause by the

movant) (quoting Sonnax). Additionally, an unliquidated unsecured creditor . . . must

establish extraordinary circumstances before the stay would be lifted in order to compel the

debtor to continue to participate as a defendant in [a] multi-defendant action in [another court].

In re Pioneer Commercial Funding Corp., 114 B.R. 45, 47 (Bankr. S.D.N.Y. 1990) (citing In re

Sonnax Indus., Inc., 99 B.R. 591, 595 (D. Vt. 1989)). Finally, even if the New York Plaintiffs

had satisfied their initial burden, the Debtors burden would be diminished here, since stay relief

is being sought so early in the case. See, e.g., In re Plastech Engrd Prods., Inc., 382 B.R. 90,

109 (Bankr. E.D. Mich. 2008) ([I]f the relief from stay is requested at the early stages of the

bankruptcy case, the burden upon the debtor is less stringent.).

5 In In re Garzoni, 2002 WL 962154 at *2 (6th Cir. May 8, 2002), an unreported decision, the Sixth Circuit

considered a different set of factors in deciding whether to lift the automatic stay to allow litigation to proceed: 1)

judicial economy; 2) trial readiness; 3) the resolution of preliminary bankruptcy issues; 4) the creditors chance of

success on the merits; and 5) the cost of defense or other potential burden to the bankruptcy estate and the impact of

the litigation on other creditors. These factors are essentially subsumed within the twelve Sonnax factors.



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As described in more detail below, the New York Plaintiffs have failed to establish even

an initial showing of cause, much less extraordinary circumstances that would warrant lifting

the stay to allow the New York Lawsuits to proceed. In fact, each of the Sonnax Factors

discussed by the movants actually weighs against stay relief here.

i. Factor 1: Lifting the Stay Would Not Result in Complete Resolution of theIssues.

Because the New York Lawsuits involve only the New York Plaintiffs, and not the

plaintiffs in the Oklahoma Lawsuit, the Ohio Lawsuit, nor any future claimants in the Patient

Litigation, lifting the stay would not result in a complete resolution of the issues. Apparently

recognizing as much, the New York Plaintiffs have recast the first Sonnax Factor. See Brief, p. 4

(Lifting the Stay . . . Will Completely Resolve the IssuesBetween the Debtors and the

Movants) (emphasis added). A complete resolution of the issues, however, would comprise

not only the New York Lawsuit, but the entire Plaintiff Litigation.

ii. Factor 2: Lifting the Stay to Allow the New York Lawsuits to ProceedWould Substantially Interfere With the Bankruptcy Case.

As discussed above, forcing the Debtors to litigate the New York Lawsuits now, when

they are occupied with effectuating the sale of their assets, and just weeks in advance of the

Mediation, would divert key personnel from the primary objectives of the Chapter 11 Cases and

jeopardize the Debtors efforts to resolve these disputes. The New York Plaintiffs contention

that proceeding with the New York Lawsuits would not interfere with the Chapter 11 Cases

because the plaintiffs have agreed that they will not seek any recovery of estate assets, is

incorrect as well as illogical. The National Union Policies are estate assets, as discussed above.

Moreover, the New York Plaintiffs ignore the overwhelming interference with this case that

would result from the onerous discovery obligations and distraction of the Debtors management.



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iii. Factor 4: The New York Supreme Court Is Not a Specialized Tribunal.The New York Supreme Court is a court of general jurisdiction. N.Y. Jud. Law 140-b

([T]he supreme court possesses under the provisions of the New York Constitution general

jurisdiction in law and equity). It is not a specialized tribunal as the New York Plaintiffs

incorrectly assert. See In re Cicale, 2007 WL 1893301, *3 n.3 (Bankr. S.D.N.Y. June 29, 2007)

(the New York Supreme Court is not a specialized tribunal). Nor has any specialized tribunal

been established to consider the Patient Litigation. Apart from a different statute of limitations

for medical malpractice claims and certain unique procedures pertaining to expert witnesses, it is

unclear what specialized treatment and unique pleading and discovery rules apply to medical

negligence cases in New York. Brief, p. 5. Moreover, in addition to their allegations of medical

negligence claims, the New York Plaintiffs have asserted claims for alleged fraud and deceptive

business practices, which are garden variety tort claims. See Complaint at Ex. A (Counts I, IV).

Further, the New York Plaintiffs assertion that the bankruptcy court does not have

experience managing New York medical personal injury cases, Brief, pp. 5-6, is beside the

point, given that this Court might lack jurisdiction to hear these cases. See 28 U.S.C. 157(b)(5).

On the other hand, the District Court for the Middle District of Tennessee, which would certainly

have jurisdiction over these personal injury tort claims, has substantial experience managing and

trying medical negligence and personal injury cases. See http://dockets.justia.com/browse/state-

tennessee/court-tnmdce/noscat-3/nos-362/ (listing 79 personal injury/medical malpractice cases

commenced in the District Court for the Middle District of Tennessee).

iv. Factor 5: The Debtors Insurers Have Not Assumed Full ResponsibilityFor Defending the Debtors in the New York Lawsuits.

The New York Plaintiffs misapply the fifth Sonnax Factor by focusing on whether the

Debtors insurance carrier has assumed responsibility for defending the New York Lawsuits,



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Brief, p. 6, rather than whether the insurer has assumedfull responsibility, as the Sonnax test

requires. In re Sonnax, 907 F.2d at 1286 (emphasis added). First, as discussed above, it is the

Debtors which are obligated to coordinate the defense of the New York Lawsuits. While the

National Union Policies cover some of the Debtors defense costs, other costs related to the New

York Lawsuits are not covered under the National Union Policies, including a portion of the fees

incurred by King & Spaulding, LLP, the Debtors national coordinating counsel for the Patient

Litigation. See Debtors application to employ King & Spalding (Docket No. 96, 11). Nor

would insurance likely cover the Debtors internal costs of coordinating litigation strategy or

managing discovery across multiple litigations in different jurisdictions. Further, insofar as the

complaints in the New York Lawsuits contain allegations of fraud and seek punitive damages,

certain potential judgments or awards might not be covered under the National Union Policies.

See, e.g., Ex. A, 133-151 (First Cause of Action Sounding in Fraud), 208-212 (Punitive

Damages). Thus, contrary to the New York Plaintiffs representation, the obligation to pay a

judgment might not be solely from the applicable insurance proceeds, Brief, p. 8, but could,

instead, be a direct obligation of the Debtors and their estates. Accordingly, this factor also

weighs in favor of denying the Motion.

v. Factor 6: The New York Lawsuits Primarily Involve Church Street andFORBA NY, Not Third Parties.

The New York Plaintiffs next assert that because Church Street and FORBA NY are just

two of numerous parties to the New York Lawsuits, the litigation primarily involves third

parties. Brief, p. 7. This contention is far-fetched. The Debtors are the leaddefendants in the

New York Lawsuits; and they likewise are the lead defendants in the Ohio and Oklahoma

Lawsuits. They are in possession of the vast majority of the documentary evidence, manage



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discovery and coordinate litigation strategy. In short, the Debtors are clearly the focus of these

litigations.

vi. Factor 7: Proceeding With the New York Lawsuits Would Prejudice OtherCreditors.

As also discussed in detail above, because the National Union Policies and their proceeds

are assets of the estate, proceeding with the New York Lawsuits risks dissipation of such estate

assets to the detriment of other claimants in the Patient Litigation. In this regard, the cases cited

by the New York Plaintiffs in support of their contention that other creditors would not be

prejudiced, are readily distinguishable from the facts of this case. Neither In re Loudon, 284

B.R. 106 (8th Cir. B.A.P. 2002) nor In re G.S. Distribution, Inc., 331 B.R. 552 (Bankr. S.D.N.Y.

2005) involved insurance policies or proceeds. Those cases merely stand for the inapt

proposition that there is no prejudice to creditors from permitting litigation to go forward in a

separate proceeding so long as the bankruptcy court precludes the plaintiff from enforcing any

judgment obtained in that non-bankruptcy proceeding. Loudon, 284 B.R. at 108; G.S. Distrib.,

Inc., 331 B.R. at 567-68. In the other two cases cited by movants, In re R.J. Groover

Construction, LLC, 411 B.R. 460 (Bankr. N.D. Ga. 2008) and In re 15375 Memorial Corp., 381

B.R. 652 (Bankr. D. Del. 2008), the creditors seeking relief from the automatic stay were the

only creditors seeking to collect judgments from the proceeds of the debtors insurance policies

at issue. In 15375 Memorial Corp., moreover, the relevant insurance policy contained no

aggregate coverage limits. Id. at 690.

In contrast, here, the New York Plaintiffs seek to collect potential judgments against the

Debtors from insurance proceeds with aggregate limits, which should be distributed equally

among all of the hundreds, if not thousands, of current and potential Patient Litigation plaintiffs.

Beiger v. United States, 496 U.S. 53, 58 (1990) (Equality of distribution among creditors [of



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equal priority] is a central policy of the Bankruptcy Code.); In re Lee, 530 F.3d 458, 463 (6th

Cir. 2008) (same). Moreover, lifting the stay not only would impair the other Patient Litigation

claimants, it also would prejudice all of the Debtors creditors by hindering the Debtors sale

efforts, distracting the Debtors from formulating an exit strategy and undermining the Mediation.

vii. Factor 10: Multiple Lawsuits In Multiple Jurisdiction Would Not PromoteJudicial Economy.

Lifting the stay at this time when the New York Lawsuits are in the early stages of

discovery, and within weeks of the Mediation would not promote judicial economy and the

expeditious and economical resolution of the litigation. Indeed, proceeding with the New York

Lawsuits would achieve just the opposite: It would force the Debtors to divert their attention

from negotiating a global resolution of the Patient Litigation and resolution of the insurance

coverage issue in a single forum.

viii. Factor 11: The New York Lawsuits Are Not Trial Ready.The New York Plaintiffs omit this factor from their analysis, and for good reason. As

discussed above, if the automatic stay is lifted, fact discovery would not be completed for least a

year, followed by various forms of motion practice, including filing and arguing dispositive

motions.

ix. Factor 12: The Balance of the Harms Favors Denying the Motion.Even if the stay were lifted, the New York Lawsuits would take substantial time to be

fully adjudicated. While the New York Plaintiffs argue that continuing the automatic stay would

therefore cause them to wait an inordinately long time to get their personal injury claims

decided and would create[] enormous hardships, Brief, p. 10, the Debtors are not seeking to

continue the stay indefinitely. Rather, the Debtors seek a brief respite of a few months from

these and other litigations in order to see the Section 363 sale to completion and to explore



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whether a global settlement is possible. The New York Plaintiffs have demonstrated no

quantifiable harm from this brief hiatus. There is no evidence that the New York Plaintiffs

would be prejudiced by [t]he aging of evidence, loss of witnesses, and crowded court dockets,

or that their claims for damages somehow will evaporate, over the next few months. Id.

Conversely, lifting the stay now while the Chapter 11 Cases are still in their infancy

would interfere with the Debtors efforts to effectuate the sale of their assets, thwart the parties

attempts to negotiate a global resolution of the Patient Litigation at the Mediation, and impede

the formulation of an exit plan. Moreover, granting stay relief in the New York Lawsuits would

likely force the plaintiffs in the Oklahoma and Ohio Lawsuits to move for stay relief as well,

triggering a race to the bottom for the Debtors assets and further impeding the Debtors

current efforts.



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IV. CONCLUSIONFor the reasons set forth herein, the Debtors respectfully request that the Court deny the

Motion, and grant such other and further relief as is just and proper.\

Dated: April 24, 2012

Nashville, Tennessee

Respectfully submitted,

By /s/ Jason W. Callen

Robert J. Walker (#2498)

J. Mark Tipps (#11710)Jason W. Callen (#26225)

WALKER, TIPPS & MALONE, PLC

2300 One Nashville Place150 Fourth Avenue, North

Nashville, TN 37219-2424

Telephone: 615. 313.6000

Email:[email protected]

Counsel for the Debtors

-and-

/s/ Kenneth S. LeonettiKenneth S. Leonetti, Esq.*

FOLEY HOAG LLPSeaport World Trade Center West

155 Seaport Boulevard

Boston, MA 02210-2600Telephone: 617.832.1000

Facsimile: 617.832.7000

Email: [email protected]

Special Litigation Counsel to the Debtors

*Admitted Pro Hac Vice



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CERTIFICATE OF SERVICE

I hereby certify that on this 24th day of April, 2012, a true and correct copy of theforegoing document was filed electronically. Notice of this filing was sent by operation of the

Courts electronic filing system to all parties indicated on the electronic filing receipt. Parties

may access this filing through the Courts electronic filing system.

/s/ Kenneth S. LeonettiKenneth S. Leonetti, Esq.

doc 292-debtors opposition to automatic stay

Documents