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In re KMC Real Estate Investors, LLC

United States District Court, S.D. Indiana, New Albany Division

September 29, 2014

KMC REAL ESTATE INVESTORS, LLC, KENTUCKIANA MEDICAL CENTER, LLC Consolidated Party re 4:13-cv-181-SEB-WGH, Appellees. In Re: KENTUCKIANA MEDICAL CENTER, LLC Debtor-Consolidated Party re 4:13-cv-181-SEB-WGH. ABDUL G. BURIDI, Appellants,



This cause is before the Court on appeal from the September 11, 2013 decision of the United States Bankruptcy Court for the Southern District of Indiana, confirming the Third Amended Plan of Reorganization that was filed by Appellee KMC Real Estate Investors, LLC ("KMCREI") and the September 12, 2013 decision of the Bankruptcy Court confirming the Third Amended Plan of Reorganization that was filed by Appellee Kentuckiana Medical Center, LLC ("KMC"). Appellant Abdul G. Buridi, M.D., filed his appeal of the Bankruptcy Court's decisions on November 5, 2013. KMC and KMCREI each filed a Motion to Dismiss Appeal on November 22, 2013 [Docket No. 33] and November 25, 2013 [Docket No. 14], respectively, arguing that we should not reach the merits of Dr. Buridi's appeal because the plans at issue have been substantially consummated, rendering his appeals moot. Dr. Buridi's two bankruptcy appeals were ordered consolidated before Magistrate Judge Hussmann effective February 19, 2014. Appellees' motions to dismiss are now fully briefed and ripe for ruling. For the reasons detailed below, we DENY Appellees' Motion to Dismiss.

Factual Background

KMC, an entity affiliated with KMCREI, was formed by Cardiovascular Hospitals of America, LLC and Kentuckiana Investors, LLC ("KI") to operate a for-profit, physician-owned acute care hospital located in Clarksville, Indiana. KI's membership interests were held by approximately thirty (30) physicians who practice in the greater Louisville, Kentucky, area, including Dr. Buridi. However, KMC's hospital facility failed when construction loan proceeds and working capital were exhausted before the facility was completed.

As a result, on September 9, 2010, KMC voluntarily commenced its Chapter 11 bankruptcy case (the "KMC Bankruptcy"). Prior to commencement of the KMC Bankruptcy, KMC was in default on its debt obligations to its primary secured lender and was unable to make payment to a number of trade creditors. At the time of its bankruptcy filing, KMC owed liabilities in excess of $25 million.

Following the commencement of the KMC Bankruptcy, KMC continued to struggle financially. Only a small number of the physician-owners of KI were regularly admitting patients to the hospital and KMC never reached its projected revenues. According to Appellees, it became clear that in order for the hospital to attain sustainability, KMC would require one or more investments of several million dollars. Knowing this, KMC's management and other constituents aggressively pursued new investors.

While the KMC Bankruptcy was pending, a foreclosure proceeding was initiated against KMCREI in Clark County, Indiana. KMCREI was at that time in default on its $21 million construction loan held by RL BB Financial, LLC ("RLBB"). KMCREI owned the real estate and improvements on which KMC operated. On April 1, 2011, KMCREI filed its voluntary petition for relief under chapter 11 of the Bankruptcy Code (the "KMCREI Bankruptcy") to obtain a stay of the foreclosure proceedings.

In June 2012, KMC and KMCREI first obtained confirmation of their respective plans of reorganization, but the original plans were never consummated. Both bankruptcy cases remained pending and upon commencement of the KMCREI bankruptcy, investors began to evaluate KMC and KMCREI as a packaged investment opportunity. During this time, KMC and KMCREI continued their efforts to solicit new investments to fund their reorganizations, but as a result of their inability to consummate their confirmed plans, KMS's post-petition debts continued to accrue through the hospital's normal business operations.

Approximately one year later, in June 2013, an RLBB affiliate (the "Exit Investor") agreed to finance the debtors' exit from Chapter 11 and new plans of reorganization were proposed. KMC's Third Amended Plan of Reorganization (the "KMC Plan"), among other cash outlays, called for the Exit Investor to provide funds necessary to satisfy nearly $6 million of post-petition administrative priority claims against KMC. KMCREI's Third Amended Plan of Reorganization (the "KMCREI Plan") provided for the restructuring of RLBB's $21 million secured loan and cash payment of $538, 573.79 to Clark County, Indiana, to satisfy past due real estate taxes. On September 11, 2013, the Bankruptcy Court entered the Amended Order Confirming Third Amended Plan of Reorganization in the KMCREI bankruptcy (the "KMCREI Confirmation Order"). The next day, on September 12, 2013, the Bankruptcy Court entered the Second Amended Order Confirming Third Amended Plan of Reorganization as Immaterially Modified in the KMC bankruptcy (the "KMC Confirmation Order").

Under the plans of reorganization, which were accepted by all classes of creditors entitled to vote, the two debtors were to be recapitalized, the hospital completed, the over $31 million secured debt paid in full, the $6 million administrative claims also paid in full, and unsecured creditors to receive a material dividend. Dr. Buridi and three other doctors with KI membership interests objected to these Plans based on their concern that certain distributions of equity set forth in the Plans to four particular doctors who provided services or referrals to the hospital operated by KMC were not compliant with federal healthcare laws applicable to doctor-owned hospitals. In order to address Dr. Buridi's concern, the Bankruptcy Court issued amended confirmation orders which required that implementation and consummation of the Plans comply with all applicable health care laws and regulations and directed that in the event that the Exit Investor determined that the proposed distributions to the particular doctors in question would violate applicable federal laws and regulations, those distributions would be modified or eliminated to the extent necessary to be in full compliance.

Despite the addition of this provision intended to address his concerns, Dr. Buridi appealed the KMCREI Confirmation Order on September 25, 2013 as well as the KMC Confirmation Order on September 26, 2013, challenging the equity distribution to the four doctors referenced above as well as an injunction issued pursuant to the Plans protecting equity holders of KMCREI. He did not seek a stay of either Confirmation Order from the Bankruptcy Court or this Court and no supersedeas bond has been posted. Despite these appeals, KMC, KMCREI, and the Exit Investor waived the conditions to the Effective Date of the plans in accordance with the Confirmation Orders, and began making plan distributions on November 7, 2013.

Between entry of the Confirmation Orders and November 7, 2013, the Exit Investor contributed funds that allowed KMC and KMCREI to perform the following obligations imposed by the Confirmation Orders: (1) make $1, 505, 896.01 in cash payments to holders of administrative claims against KMC; (2) issue promissory notes totally $13, 243, 191.00 to holders of secured claims and administrative claims against KMC; (3) pay $752, 292.13 to Clark County, Indiana, to satisfy taxes owed by KMC and KMCREI; (4) pay $250, 000.00 cash to holders of secured claims against KMC; (5) reserve $500, 000.00 to satisfy the claims of holders of general unsecured claims against KMC; and (6) purchase over $100, 000.00 of equipment for the hospital. The Exit Investor also provided nearly $1 million of additional capital into KMC to facilitate completion of the hospital. Since the reorganization began, KMC has entered into an emergency room contract with EmCare, a management agreement with Galichia Hospital Group, LLC, as well as approximately $2.6 million worth of contracts to complete and furnish an approved 12-bed telemetry unit. A new chief executive officer of the hospital has also been retained to manage reorganized KMC. A new management group identified in the KMC Plan, Galichia Hospital Group, LLC, has assumed management of KMC's property and business operations. Additionally, one hundred percent of the equity in the reorganized KMC and KMCREI is now owned by the Exit Investor.

KMC and KMCREI moved to dismiss Dr. Buridi's appeals on November 22, 2013 and November 25, 2013, respectively, arguing that Dr. Buridi's appeal is moot because the reorganization plans have been substantially completed. ...

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