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                           AMERICAN                              BANKRUPTCY                                          INSTITUTE



                                 The Essential Resource for Today’s Busy Insolvency Professional

Diagnosing Medical Malpractice Coverage and
Treatment in Health Care Chapter 11s: Part I
Contributing Editor:                                                                                                 Although the
Harold L. Kaplan                                              About the Authors                                      prompt attention to
Foley & Lardner LLP                                  Harold Kaplan is a partner with Foley                           medical malpractice
Chicago and New York                                 & Lardner LLP in its Chicago and New                            claims in SVCMC
hkaplan@foley.com                                    York offices. He is also the leader of the                      II may be more the
Also Written by:                                     firm’s Corporate Trust and Bondholders                          result of the unique
Andrew M. Troop                                      Rights Team and is a member                                     approach to the
Cadwalader, Wickersham and Taft LLP                  of the Bankruptcy and Business                                  treatment of medical
New York                                             Reorganizations Practice. Andrew                                malpractice claims
andrew.troop@cwt.com                                 Troop is a partner with Cadwalader,           Andrew M. Troop   in SVCMC I (which,
                                                     Wickersham and Taft LLP in New York                             among other things,
Editor’s Note: This is part one of a two-                                                         appointed a “monitor” to deal with issues
                                                     and focuses his practice on business
part article.                                                                                     involving the various trusts established
                                                     reorganizations and debtors’ and


M
             e d i c a l malpractice claim           creditors’ rights.                           under SVCMC I for payment of medical
             exposure and coverage are                                                            malpractice claims), than the result of
             neither new nor insignificant          care facility to restructure or reorganize.   a new approach to addressing medical
issues in distressed health care facility           Moreover, a lack of sufficient third-party    malpractice claims in chapter 11 cases,
restructurings under chapter 11. This               malpractice insurance can be devastating      many health care restructurings might
two-part article will focus on certain              to medical malpractice claimants who          benefit from a more prompt assessment
unique issues and features relating to the
administration and treatment of medical
malpractice claims in chapter 11. Part
one will discuss claims administration                Intensive Care
and representation issues, including the
identification of and giving of notice to
known and unknown medical malpractice               find themselves with little or no ability     of the unique issues involving medical
claimants, complications presented                  to recover on legitimate claims, as well      malpractice claims, as described below.
by federal and state patient record                 as to hospital physicians and other staff
confidentiality statutes and regulations,           who may then be looked to for recovery        Major Unique Medical
limitations on bankruptcy court jurisdiction        if hospital coverage is unavailable.          Malpractice Claim Issues
to administer and liquidate malpractice                 Historically, consideration of these          In addition to the many other issues
claims, and the possible appointment and            issues has often been an afterthought         that arise in health care chapter 11 cases,
role of an official medical malpractice             in health care restructurings, where          there are a number of unique, non-
claimants committee. Part two, which will           liquidity, revenues and other operational     intuitive and even surprising factors that
appear in a future edition, will address            issues tend to be the cause of distress.      may be relevant and should be considered
alternatives in the plan treatment of               The recent “chapter 22” filed by Saint        early in formulating a process and
medical malpractice claims.                         Vincents Catholic Medical Centers             strategy to deal with medical malpractice
                          The nature and            (SVCMC) in the Southern District of New       claims and their implications. These
                          extent of medical         York, however, suggests that distressed       factors, as discussed in this article, fall
                          malpractice liability,    health care entities that seek chapter 11     into two broad categories: (1) claims
                          coupled with the          protection may be required to address a       administration and representation, and (2)
                          (lack of) availability    number of unique medical malpractice          plan treatment, which will be discussed in
                          of sufficient third-      issues on an increasingly immediate and       part two of this article.
                          party insurance           urgent basis (particularly to the extent      1	 SVCMC’s	first	chapter	11	case	(SVCMC I)	was	filed	in	the	U.S.	Bankruptcy	

                          coverage, can have        such liabilities are not fully covered by        Court	for	the	Southern	District	of	New	York	on	July	5,	2005,	and	its	plan	was	
                                                                                                     confirmed	on	July	27,	2007.	SVCMC I	was	docketed	as	05-14945	(ASH).	Mr.	
                          a dramatic impact on      applicable third party insurance policies        Troop	was	debtor’s	council	in	SVCMC	I.	SVCMC’s	second	chapter	11	case	
Harold L. Kaplan          the ability of a health   or self-insurance trusts).1                      (SVCMC II)	was	filed	in	the	U.S.	Bankruptcy	Court	for	the	Southern	District	of	
                                                                                                     New	York	on	April	14,	2010,	and	has	been	docketed	as	10-11963	(CGM).


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Claims Administration                                                                Statutory Confidentiality Rights of Patients                                              the requirement that papers filed in
                                                                                         Resolution of a debtor’s medical                                                      bankruptcy cases be publicly available
and Representation                                                                   malpractice liabilities is further                                                        is not new, the concern about the level
Claims Identification
                                                                                     complicated by the confidential nature                                                    of disclosure that results from a filing is
    At the commencement of a health
                                                                                     of information related to these claims.                                                   heightened now that most pleadings and
care entity’s chapter 11 case, (1) most
                                                                                     Particularly in the last decade, federal                                                  proofs of claim are easily accessible over
medical malpractice claims will be
                                                                                     and state laws and regulations have                                                       the Internet, rather than solely in paper
unliquidated, contingent and, often,
                                                                                     increasingly required that patient                                                        form at the clerk’s office.
highly disputed pre-petition unsecured
                                                                                     information and records be kept                                                                In SVCMC I and SVCMC II, the
claims, and (2) a substantial (but
                                                                                     confidential. Specifically, not only does the                                             debtors also addressed these concerns
unknown) portion of the debtor’s total
                                                                                     federal Health Insurance Portability and                                                  as they related to their schedules by
potential medical malpractice liabilities
                                                                                     Accountability Act (HIPPA)3 establish,                                                    omitting certain personal information
may not have been asserted as of the
                                                                                     among other things, federal regulatory                                                    from those documents. 8 The debtors
commencement of the debtor’s chapter
                                                                                     limits on the use and disclosure of certain                                               addressed these concerns as they
11 case, and, accordingly, the identity
                                                                                     patient health information (including,                                                    may have manifested themselves in
of many potential claimholders (as
                                                                                     generally, any part of a patient’s medical                                                connection with the filings of proofs
well as the potential amount of their
                                                                                     records or payment history),4 but states                                                  of claim—particularly the concerns
claims) will be unknown. In addition,
                                                                                     also regulate the disclosure of patient                                                   over Internet access to information
the subjective nature of many medical
                                                                                     medical information, often in ways which                                                  about medical malpractice claims—by
malpractice claims, and the potentially
                                                                                     differ from each other and from HIPPA.5                                                   successfully moving for authority to
lengthy statutes of limitations periods
                                                                                         These patient record confidentiality                                                  limit Internet access to information about
with respect to certain types of medical
                                                                                     statutes and regulations often appear                                                     and copies of personal injury or wrongful
malpractice claims and claimants (e.g.,
                                                                                     to conflict directly with the disclosure                                                  death (including medical malpractice)
with respect to minors or incapacitated
                                                                                     requirements placed on a debtor under                                                     proofs of claim to the debtors, and to
persons, or “foreign object” cases)
                                                                                     the Bankruptcy Code to identify known                                                     counsel for official committees appointed
increases the uncertainty as to which
                                                                                     potential liabilities publicly. These                                                     in SVCMC I’s chapter 11 case. Copies of
current and former patients should be
                                                                                     confidentiality requirements raise issues                                                 these proofs of claim remained available
considered potential creditors.
                                                                                     as to the appropriate detail to be supplied                                               to the public, but could only be accessed
    This inability to identify precisely
                                                                                     in the debtor’s schedules,6 as well as the                                                in person at the bankruptcy court (or by
those former patients with claims or
                                                                                     public availability of medical malpractice                                                leave of the bankruptcy court).
potential claims against a health care entity
                                                                                     proofs of claims and the claims registry.                                                      One jurisdiction, the Bankruptcy Court
based on alleged medical malpractice
                                                                                     Further, many of a debtor’s internal                                                      for the District of Massachusetts, recently
creates particularized issues relating to
                                                                                     policies and procedures with respect                                                      took action with respect to protecting
providing notice in a chapter 11 case
                                                                                     to establishing reserves for asserted or                                                  private medical information with respect to
sufficient to bind those individuals to
                                                                                     potential medical-malpractice claims                                                      proofs of claim. On July 1, 2010, the court
deadlines or other relief entered in the
                                                                                     (particularly to the extent that they would                                               entered a standing order authorizing (but
case that affects their rights, including,
                                                                                     reflect an enterprise’s strategic approach                                                not obligating) the court clerk to cause “any
for example, the deadline for filing claims
                                                                                     to establishing settlement values of                                                      attachment or exhibit to a proof of claim or
against a debtor (the “bar date”) and the
                                                                                     such claims) may constitute proprietary                                                   to any document to be imaged as a ‘private
debtor’s bankruptcy discharge. Although
                                                                                     information or even health care trade                                                     event’ under the Court’s electronic filing
“known” medical malpractice claimants
                                                                                     secrets, the disclosure of which, while                                                   system in the event that the attachment
are entitled to actual notice, in order to
                                                                                     perhaps not illegal, may put the debtor at                                                or exhibit contains medical information...
bind “unknown” creditors to the bar date,
                                                                                     a significant disadvantage in negotiating                                                 or otherwise contains information
the debtor’s discharge and to other orders
                                                                                     settlements with other asserted medical-                                                  whose unrestricted disclosure may not
of the bankruptcy court affecting such
                                                                                     malpractice claimants. As a general                                                       be appropriate.” The standing order also
creditors’ interests, a debtor may need only
                                                                                     matter, and with only limited exceptions                                                  permits parties in interest to request that
provide constructive notice of the bar date.
                                                                                     to protect “trade secret or confidential                                                  “private event” status be terminated and
Constructive notice generally is provided
                                                                                     research, development or commercial                                                       the information be made public.9
by publication of the bar date in periodicals
                                                                                     information” or to “protect a person                                                      Limitations on Jurisdiction in Liquidating/
reasonably calculated to reach parties
                                                                                     with respect to scandalous or defamatory                                                  Estimating Malpractice Claims
potentially having interests in the debtor’s
                                                                                     matter contained in a paper filed,”                                                           Bankruptcy courts expressly lack
chapter 11 case, and bankruptcy courts are
                                                                                     all papers filed in a bankruptcy case                                                     jurisdiction to determine the amount
often asked to rule on the reasonableness
                                                                                     are available to the public. 7 Although
of such notice in advance. If reasonably                                                                                                                                       8	 In	both	cases,	the	omission	of	this	material	was	noted	in	the	schedules	
calculated to reach “unknown” creditors,                                             3	 Health	Insurance	Portability	and	Accountability	Act	of	1996,	P.L.104-191.
                                                                                     4	 Health	 care	 entities	 may	 disclose	 patient	 health	 care	 information	
                                                                                                                                                                                  themselves.	 In	 SVCMC II,	 a	 general	 note	 was	 added	 to	 SVCMC’s	
                                                                                                                                                                                  schedules	as	follows:
it does not matter whether in fact the                                                  to	 facilitate	 treatment,	 payment	 or	 health	 care	 operations,	 or	 with	             	 E. Confidentiality
“unknown” creditor read or was otherwise                                                authorization	 of	 the	 applicable	 patient	 or	 as	 otherwise	 required	 by	
                                                                                        law,	 but	 must	 make	 reasonable	 effort	 to	 disclose	 only	 the	 minimum	
                                                                                                                                                                                  	 Specific	 disclosure	 of	 certain	 claims,	 names,	 addresses	 or	
                                                                                                                                                                                      amounts	 may	 be	 subject	 to	 certain	 disclosure	 restrictions	
aware of the notice for it to be binding.2                                              necessary	information	required	to	achieve	such	purpose.                                       contained	 in	 the	 Health	 Insurance	 Portability	 and	
                                                                                     5	 For	 example,	 California	 generally	 has	 no	 requirements	 regarding	                       Accountability	 Act	 of	 1996	 (“HIPAA”),	 or	 otherwise,	 and	 in	
2	 In re Saint Vincents Catholic Medical Centers of New York d/b/a Saint                disclosure	of	patient	information	for	purposes	of	treatment,	payment	or	                      any	event,	are	of	a	particularly	personal	and	private	nature.	
   Vincent Catholic Medical Centers, et al.,	 Case	 No.	 05-14945	 (ASH),	              health	care	operations,	while	New	York	law	is	similar	in	many	respects	                       To	 the	 extent	 the	 Debtors	 believe	 a	 claim,	 name,	 address	
   Docket	 No.	 3629	 (Bankr.	 S.D.N.Y.	 Aug.	 29,	 2007),	 aff’d,	 Case	 No.	 07	      to	 the	 regulations	 imposed	 by	 HIPPA.	 Further,	 there	 is	 considerable	                 or	 amount	 falls	 under	 the	 purview	 of	 HIPAA	 or	 includes	
   Civ.	 8778	 (AKH),	 Docket	 No.	 14	 (S.D.N.Y.	 Feb.	 6,	 2008).	 In re Saint        uncertainty	regarding	the	extent	to	which	HIPPA	has	pre-empted	many	                          information	that	is	personal	or	private	in	nature,	such	claims,	
   Vincents Catholic Medical Centers of New York d/b/a Saint Vincent                    of	the	state	laws	and	regulations	regarding	patient	medical	information.                      name,	 address	 or	 amount	 (as	 applicable)	 is	 not	 included	 in	
   Catholic Medical Centers, et al.,	 Case	 No.	 05-14945	 (ASH),	 Docket	           6	 Fed.	 R.	 Bankr.	 P.	 1007.	 Also,	 11	 U.S.C.	 §	 112	 limits	 the	 disclosure	 of	          Schedules	and	Statements.
   No.	 3611	 (Bankr.	 S.D.N.Y.	 Aug.	 27,	 2007),	 aff’d,	 2008	 WL	 1721471	          certain	information	involving	minors.                                                  9	 Standing	 Order	 No.	 10-03,	 In re Attachments	 or	 Exhibits	 to	 Proofs	 of	
   (S.D.N.Y.	April	10,	2008).                                                        7	 11	U.S.C.	§	107.                                                                          Claim	(Bankr.	D.	Mass.	July	1,	2010).



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of personal injury or wrongful death            A U.S. Trustee has the authority to
claims for, at a minimum, purposes of           appoint such a committee,11 and if he or
distributions to be made under a plan           she chooses not to do so, the bankruptcy
of reorganization. Section 157(b)(2) of         court, on request of an interested party,
title 28 of the U. S. Code (the “Judicial       may order the U.S. Trustee to appoint
Code”) carves out from a bankruptcy             such a committee if the bankruptcy court
court’s “core” jurisdiction “the                determines that a separate committee is
liquidation or estimation of contingent         needed to provide medical malpractice
or unliquidated personal injury tort            claimants with “adequate representation”
or wrongful death claims against the            in the chapter 11 case.12 In some instances,
estate for purposes of distribution             the appointment of a statutory committee
in a case under” the Bankruptcy                 for medical malpractice claimants
Code (28 U.S.C. § 157(b) (2) (B)),              may not only be necessary to provide
and § 157(b) (5) of the Judicial Code           adequate representation, but it may also
requires a district court to “order that        be viewed as conducive to facilitating the
personal injury tort and wrongful death         formulation and confirmation of a plan
claims...be tried in the district court.”10     of reorganization, notwithstanding the
Accordingly, a bankruptcy court’s               general preference of the U.S. Trustee
expedited (and usually efficient) means         and debtors to avoid the appointment of
of liquidating claims against a debtor          multiple committees.
would not seem generally available                   The amendment by the Bankruptcy
with respect to medical malpractice             Abuse Prevention and Consumer
claims. Additionally, although they are         Protection Act of 2005 (BAPCPA) to
empowered to do so, district courts are         require (subject to certain exceptions)
not likely to be receptive to a debtor          that a patient care ombudsman (PCO) be
seeking to liquidate a large number of          appointed in chapter 11 cases of health
medical malpractice claims that are             care entities might be seen as weakening
generally unique and would, in the              any request by medical malpractice
ordinary course, be resolved through            claimants for the appointment of a
the applicable state court system.              special committee to represent their
There are, therefore, both practical            interests. The PCO is statutorily required
and jurisdictional concerns at play in a        to “represent the interests of the patients
chapter 11 case in determining where            of the [debtor] healthcare business.”13
and how medical malpractice claims are          Whether this statutory mandate for a
to be resolved.                                 PCO even includes representing former
Official Committees and Tort/Medical            patients with malpractice claims is
Malpractice Claimants                           certainly open to question, as is whether
    Claims based on alleged acts of             it would be efficient for the statutory
medical malpractice are generally               representative of patients to take on any
unsecured claims (other than those claims       responsibility for former patients.
that have been resolved by judgment pre-        Conclusion
petition and are secured by a judgment lien         Having focused on bringing under
against the debtor’s assets). Accordingly,      control the procedural and administrative
potential medical malpractice claimants         challenges raised by medical malpractice
hold claims of a type represented by            claims, the various possible alternative
a statutory committee appointed to              treatments of such medical malpractice
represent the interests of all unsecured        claims under an ultimate chapter 11
creditors (the “official creditors’             plan of reorganiztion will need to be
committee”). The interests of medical           considered and implemented. This is the
malpractice claimants may differ from           focus of part two of this article. n
the interests of ordinary general unsecured
trade creditors typically represented by an     Reprinted with permission from the ABI
official creditors’ committee, particularly     Journal, Vol. XXIX, No. 6, July/August 2010.
given the overwhelming contingent,              The American Bankruptcy Institute is a
unliquidated and often disputed nature of       multi-disciplinary, nonpartisan organization
most medical malpractice claims and the         devoted to bankruptcy issues. ABI has
availability—in some circumstances—of           more than 12,500 members, representing
both insurance and other defendants for         all facets of the insolvency field. For more
those claims. Given these differences,          information, visit ABI World at www.
medical malpractice claimants may wish          abiworld.org.
to have their own statutory committee           11	 See 11	U.S.C.	§	1102(a)(1).
in a health care entity’s chapter 11 case.      12	 See 11	U.S.C.	§	1102(a)(2).
10	 See 28	U.S.C.	§	157(b)(5).                  13	 See 11	U.S.C.	§	333(a)(1).	



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