A federal bankruptcy judge last week refused to authorize the $13 million sale of Newark, N.J.-based United Healthcare System to Saint Barnabas Health Care System, Livingston, N.J., charging that United's board of trustees acted illegally.
Meanwhile, the bidding war for the financially distressed hospital's pediatric business continued last week as two Newark-based partners-University of Medicine and Dentistry of New Jersey and Cathedral Healthcare System-sweetened their offer with a new bid of $18 million.
These were the latest twists in what seemingly began as an earnest, last-ditch effort by United's board to salvage the hospital's general acute-care and specialized pediatric mission. The situation snowballed into a complicated court case involving a raft of attorneys and consultants.
U.S. Bankruptcy Judge William F. Tuohey in Newark cut short a fourth day of testimony at a hearing on the proposed sale last week to issue his opinion. Tuohey found United violated federal bankruptcy statutes by asking the state Department of Health and Senior Services to terminate its certificates of need before it filed for Chapter 11 bankruptcy protection. The state voided United licenses and simultaneously issued new ones to Newark-Beth Israel Medical Center, a unit of Saint Barnabas.
The sale approved by United's board on Feb. 18 did not involve property, buildings or the troubled hospital's substantial debts. Rather, Saint Barnabas submitted a bid to acquire the "goodwill" associated with United, including its designation as the Children's Hospital of New Jersey and its license to provide pediatric cardiac surgery.
As a condition of the sales agreement, United filed a Chapter 11 petition. For the sale to be approved, though, Tuohey had to rule that United's board exercised good business judgment. But in a 19-page opinion issued last week, Tuohey found the board's judgment lacking.
"The board and its agents' actions in seeking to terminate the (CON) of the debtor 24 hours before filing bankruptcy caused a valuable asset of the estate to be placed in jeopardy," Tuohey wrote. "This action has defeated the ability of this court to carry out its function to obtain a fair price for the debtor's assets for the benefit of the creditors of this estate."
He ordered United to petition New Jersey Health Commissioner Len Fishman to reconsider the decision to void United's CONs. Touhey asked that the CONs be reinstated for a 10-day period so that the bidding for United may continue.
The ball is now in Fishman's court. But at deadline, the health department had not determined how it may respond to the judge's order, a spokeswoman said.
Robert Malone, a partner in the bankruptcy practice of Shanley & Fisher, Morristown, N.J., said the decision is "very important" because it establishes that hospitals may not seek a CON transfer prior to filing for bankruptcy. Malone, whose client is Cathedral Healthcare, believes the ruling is unprecedented in New Jersey and may have national implications.
But in a written statement, Ronald J. Del Mauro, president and CEO of Saint Barnabas, said the health department's decision to issue a CON to its Newark-based unit "was appropriate and protected the best interests of the citizens of Newark and New Jersey." He added, "We will pursue any and all avenues to protect our (CON)."
In court last week, though, an attorney for Saint Barnabas said if the system was not the highest and best bidder at the end of the hearing, it would withdraw its bid.
During bankruptcy court proceedings, attorneys for UMDNJ and Cathedral challenged the board's decision to sell its valued pediatric designation and licenses to Saint Barnabas. Much of the testimony focused on two secret ballots cast by United's board. The first vote of 9-6 favored the UMDNJ-Cathedral plan over Saint Barnabas. But United's legal counsel, Jeffrey Becker, believed that a "super majority" would be needed for the vote to carry. Some 20 minutes lapsed while Becker verified the law pertaining to the vote. During that time, some board members discussed how and why they voted. A second closed ballot resulted in a reversal, with Saint Barnabas winning 10-5.
John Dandridge Jr., United's president and CEO, was one of the board members who switched on the second vote. Dandridge attributed his change of heart to thinking about where he would feel most comfortable taking his 7-year-old in an emergency.
Tuohey's decision, however, doesn't dwell on the second vote. Instead, he derided the board's reasoning. "The court finds the UMDNJ-Cathedral proposal saved more jobs; gave better protection to physician contracts; and was for more money (when other terms are factored into the equation). Further, the court concludes the price is not adequate based upon the $5 million higher offer (made by UMDNJ-Cathedral)," he wrote.