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California AG Aims to Block County’s Purchase of Two San Jose-Area Hospitals

On January 9, 2019, California Attorney General Xavier Becerra filed a motion with the U.S. Bankruptcy Court for the Central District of California – Los Angeles Division (the “Court”), requesting that the court stay its December 27th Sale Order, which approved Santa Clara County’s $235 million bid to purchase two hospitals from Verity Health System of California (“Verity”).[1] The Sale Order authorized Santa Clara County’s (the “County”) acquisition of O’Connor Hospital in San Jose and St. Louise Regional Hospital in Gilroy (including the DePaul Health Center in Morgan Hill) as part of Verity’s ongoing Chapter 11 Bankruptcy reorganization.[2]

The Attorney General argues that the Sale Order should be stayed to allow the Attorney General time to appeal the Court’s decision to approve the Sale Order free and clear of certain binding conditions the Attorney General had requested to be imposed on the sale. The Attorney General argues that the conditions that were imposed on the initial acquisition of the hospitals by Verity’s owner, BlueMountain Capital Management, in 2015 should apply to the current sale of the hospitals from Verity to the County.[3] Such conditions included requirements that the hospitals continued to operate as licensed general acute care hospitals, to participate in the Medi-Cal and Medicare programs for certain at-risk populations, and deliver 24-hour emergency medical services. The Attorney General asserts that the current purchase agreement that Verity and the County executed fails to include the 2015 conditions.[4]

A hearing regarding the stay is set for January 30, 2019. If the Court grants the stay, it would cause a breach of the purchase agreement between the County and Verity. A breach of the purchase agreement would jeopardize the parties’ ability to consummate the transaction and may ultimately kill the deal. Even if the Court denies the stay, the Attorney General may choose to appeal the decision, causing further delay and uncertainty to the future of the two San Jose-area hospitals.

Since the County was the sole bidder for the two hospitals, a failure to close the transaction on time may result in a significant impact to the hospitals’ future operations. In a January 10thpress release from Santa Clara County Office of the County Executive, Jeffrey Smith, M.D., J.D. stated that his “concern is that if the transaction is not completed on time, the deal is dead and the future of the hospitals is uncertain,” and that he sees the Attorney General’s appeal to block the sale as “a real threat to the health of [the] community, [the] residents and the vulnerable populations the hospitals serve.” The Attorney General argues, however, that a stay would actually promote public interest by allowing the Attorney General to retain its policing and regulatory powers and enforce the original conditions (designed by then-sitting Attorney General, Kamala Harris) to protect the general health, safety and welfare of the public.

Amidst it all, such an exercise of the Attorney General’s police power begs the question as to what it means to protect the “health, safety and welfare of the public.” On one hand, if the Bankruptcy Court grants the stay, the Attorney General’s police and regulatory powers to enforce the 2015 conditions are preserved. Conversely, if the Court issues the stay, it may result in the closure of both hospitals, which could significantly impact the communities, residents, patients and employees that the two hospitals serve and employ daily. Finally, if the County is correct that a stay in the transaction could result in the closure of the hospitals, the Attorney General’s action could have the impact that the Attorney General is trying to prevent by demanding the addition of the prior conditions to the current transaction.  In other words, if the County’s concerns come to pass, the stay requested by the Attorney General would result in the hospitals’ ceasing to operate as licensed Medicare and Medi-Cal-participating general acute care hospitals. Much remains to be seen.


[1] https://www.santacruzsentinel.com/2018/12/10/santa-clara-county-acquires-two-hospitals-winning-auction-by-default-2/

[2] https://www.modernhealthcare.com/article/20190111/NEWS/190119983

[3] https://patch.com/california/gilroy/state-files-stay-hospital-sale-santa-clara-co

[4] https://www.sccgov.org/sites/opa/newsroom/Documents/News%20Release%20AG%20attempts%20to%20block%20hospitals%20sale%20FINAL.pdf

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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Taylor Ashton is an associate in the Corporate Practice Group in the firm's Century City office.

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  • B.A., University of Arizona

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