Calif. AG's move to delay Verity hospital sale could kill the deal

California's attorney general asked a bankruptcy judge to block the sale of two Verity Health hospitals to Santa Clara County while he appeals the judge's ruling to let the deal proceed without the AG's prior conditions for their operation.

The county warned that granting the stay could kill the sale and imperil the hospitals' survival.

The U.S. Bankruptcy Court in Los Angeles will hold a hearing Jan. 30 to consider Attorney General Xavier Becerra's motion to stay the sale of O'Connor Hospital in San Jose and St. Louise Regional Hospital in Gilroy while Becerra's office appeals the court's decision last month to approve the sale without the conditions.

Santa Clara County signed a deal to buy the two hospitals out of the Verity Health System's bankruptcy for $235 million, with the idea of using those facilities to ease overcrowding at the county's Valley Medical Center. It was the sole bidder. The transaction is scheduled to close Feb. 28.

"We have to close the deal by the end of February or it's dead," said Dr. Jeff Smith, the Santa Clara County executive. "If they are successful in their objections, I presume the hospitals would close."

He argued that the attorney general's office had agreed to the sale without the conditions, many of which the county could not legally comply with.

Bankruptcy Judge Ernest Robles agreed with the county's position. He ruled on Dec. 27 that Becerra waived the right to object to the sale of the hospitals free and clear of the conditions, and that the sale of a not-for-profit healthcare facility to a public entity is not subject to the office's review under state law.

In court papers, Becerra argued his office never waived the 53 conditions it imposed in 2015 when it consented to the Catholic Daughters of Charity's sale of its six hospitals to BlueMountain Capital management, owner of Verity Health. He said the 2015 conditions are binding for 15 years on any future owners.

"The California Department of Justice is committed to advocating for conditions that ensure communities have access to essential healthcare services," an agency spokeswoman said.

Last year, billionaire entrepreneur Dr. Patrick Soon-Shiong bought Verity and its hospitals. He hoped to use the facilities as sites for his ambitious precision medicine initiatives.

But when Verity filed for bankruptcy last September, it said it couldn't continue to operate the hospitals due to more than $1 billion in bond debt and unfunded pension liability, an inability to renegotiate contracts and the continuing need for significant investments to address seismic requirements and aging infrastructure.

Verity said it was losing $175 million annually on a cash flow basis.

Some of the conditions on the 2015 sale related to community protection, including requiring continued provision of 24-hour emergency and trauma services, reproductive health services and charity care and services to low-income patients.

The attorney general argued that granting the stay on the sale would have no major impact on interested parties in the Verity bankruptcy case, while there would be greater harm to the community if the sale went through without the office's conditions.

But Smith said the county plans to comply with all of Becerra's clinical conditions from 2015. It cannot comply, however, with conditions such as assuming the previous owner's pension obligations or collective bargaining agreements, because the county operates under different statutory requirements, he added.

"The whole reason we want to buy the hospitals is to continue the services," he said. "We have no desire to close down services or stop caring for poor people because that's our mission."