Pricey Land Complicates Options For Ailing NYC Hospital

This article by Pete Brush first appeared Law360.com on March 27, 2013.

Law360, New York (March 27, 2013, 10:10 PM ET) — Sky-high valuations for the real estate on which Brooklyn, N.Y.’s nearly insolvent Long Island College Hospital sits, estimated to be as much as $500 million, are creating a “perverse financial incentive” and complicating legal efforts by labor unions to save it, bankruptcy and other experts said Wednesday.

The comments come as unions, including the New York State Nurses Association and their political allies, have vowed to take legal steps to keep the 155-year-old hospital in Brooklyn’s Cobble Hill neighborhood from being shuttered and sold to developers.

Labor won a round in March, when a state trial judge said an initial vote to shut down the hospital ran afoul of open meetings law. That ruling marked only a fleeting victory, however.

The Board of Trustees of the State University of New York, which owns LICH after an ill-fated 2010 merger, promptly held another meeting and voted for closure a second time, in full view of hundreds of doctors and nurses who work there.

The second vote put the hospital’s future squarely in the hands of the New York State Department of Health, which must approve any closure plan.

With the hospital bleeding millions of dollars per week and no bailout money in the state’s budget — which is being hammered out in the state Legislature this week — pressure will be on the agency to move quickly. No timetable, however, was immediately available.

Meanwhile, counsel for the labor groups working to keep the LICH open say they are exploring all of their legal options, but declined to tip their hand on specifics.

Some have suggested bankruptcy could be a way to keep the hospital afloat, as it has been for some other Brooklyn hospitals. But in the case of LICH, such a move would be fraught with peril, according to Butzel Long PC financial restructuring partner Max J. Newman.

“For LICH to get into bankruptcy there’s a hurdle — and to get out, there would be a mountain,” he said.

Having voted for closure, SUNY’s board likely won’t support a bankruptcy filing, according to Newman. That means a Chapter 11 foray would probably have to come in the form of an involuntary petition by creditor groups.

If creditors — labor unions, for example — did manage to get into bankruptcy court that way, getting out would be even more difficult, he noted, because “bankruptcy is not particularly good at social issues” and would instead be driven by economics.

“If someone is valuing the real estate at $500 million, it’s going to sabotage the bankruptcy plan process,” Newman said, explaining that no plan creditors put forward at this point would eclipse the huge potential recovery from a land sale.

The $500 million valuation comes from a January report by the state comptroller in which SUNY said it had seen recent appraisals pegging the property at values ranging from $280 million to $500 million.

Short of bankruptcy, which quickly devolves from reorganization to liquidation without strong creditor agreements going in, other restructuring alternatives might be available, according to health care lawyer Craig B. Garner, a former community hospital CEO.

LICH, which has been criticized for bleeding cash because of outdated systems and mismanagement, could “partner with another institution and leverage off an advanced information technology platform … to reduce costs and increase efficiency,” Garner said.

Such a move, if successful, could position SUNY to ask the federal government for more aid. But finding a partner might be difficult, especially because many local industry experts have concluded there simply is too much hospital competition in New York City for LICH to remain open.

For instance, Continuum Health Partners, which owned LICH before selling it to the SUNY system in 2010, competes with the ailing hospital through its Beth Israel Medical Center and St. Luke’s-Roosevelt Hospital Center.

The uncertainty of finding a partner, coupled with the “perverse financial incentive” created by a $500 million potential payday, has led City Councilman Brad Lander, a Brooklyn Democrat, to seek another option, according to a spokesman.

Lander proposed that the city dissuade private real estate developers by applying “contextual zoning,” requiring that the property keep to a 50-foot height limit in order to conform to historic preservation rules in the surrounding neighborhood.

Failing that, Lander has proposed simply adding the hospital campus to the surrounding historic district.

“We have serious concerns about SUNY’s plan to sell off essential, public health care infrastructure,” Lander said in a recent letter to New York City’s Landmarks Preservation Commission that accompanied his rezoning proposals.

Legislative efforts also are under way in Albany to protect LICH. But a budget bill to fund New York state’s health programs contains provisions that could give SUNY the power to sell the hospital. Despite some late-night fireworks in the state Senate, the bill is moving forward this week.

The spending bill passed the state Senate following a 34-26 vote — far closer than normal budget votes, because of the provisions related to the hospital’s closure.

During a testy floor debate, state Sen. Daniel Squadron, D-Brooklyn, reminded the Legislature that the state had spent $63 million in grant money to buy LICH away from Continuum Health Partners. Yet the budget bill contains “not one dollar” to protect Brooklyn’s medical infrastructure in the event the hospital is shuttered, he said.

“Consider if someone said to you $500 million of state assets in your community were going to be sold to the highest bidder, with no regard for community input,” Squadron said.

But observers familiar with the process wondered whether any legal tactic could overcome the allure of a half-billion dollars in the state’s pocket.

“It’s a shame whenever these things happen to hospitals, whether they be private or public,” Newman said.

–Editing by Kat Laskowski and Chris Yates.

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