Bottom Line:

The United States Bankruptcy Court for the District of South Carolina in In re Barnwell County Hospital, No. 11-06207 (Bankr. D.S.C. Oct. 27, 2011) held that an ad hoc community group of citizens formed for the purpose of attempting to keep the Barnwell County hospital open and operating in its current location (the “Community Group”) was not a party-in-interest in the hospital’s bankruptcy case and so lacked standing to challenge the debtor’s eligibility for relief under chapter 9 of the Bankruptcy Code.

What Happened:

The Debtor filed for chapter 9 protection, purportedly on account of large operating losses and a decision by the county to discontinue funding that it historically had been providing to the hospital.  The Debtor had located a potential purchaser, another hospital from a nearby county, also under chapter 9 protection, which planned to consolidate the hospitals into a single hospital to serve both counties.  The Community Group, comprised of between 900 and 1200 county citizens, was formed to further the following purposes:

  1. To preserve and protect the existence of the Barnwell County Hospital and to insure that it remains in Barnwell County;
  2. To oppose the filing of bankruptcy by the Barnwell County Hospital Board; and
  3. To oppose the sale of the Barnwell County Hospital.

The Community Group filed, among other things, a motion seeking the Bankruptcy Court’s determination that the Community Group was a party in interest for purposes of objecting to the Debtor’s eligibility for chapter 9 relief (the “Standing Motion”).     

Standing in bankruptcy court is primarily governed by section 1109 of the Bankruptcy Code, which provides a non-exhaustive list of parties in interest that may be heard in a bankruptcy case, including (but not limited to) “the debtor, the trustee, a creditor’s Community Group, an equity security holders’ Community Group, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.”  In determining whether the Community Group constituted a party in interest, the Bankruptcy Court began its analysis by looking to the test federal courts use to determine standing, quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992) (internal citations omitted):

First, the plaintiff must have suffered an “injury in fact”– an invasion of a legally protected interest which is (a) concrete and particularized and (b) “actual or imminent, not `conjectural’ or `hypothetical.’”  Second, there must be a causal connection between the injury and the conduct complained of-the injury has to be “fairly . . . trace[able] to the challenged action of the defendant, and not . . . th[e] result [of] the independent action of some third party not before the court.”  Third, it must be “likely,” as opposed to merely “speculative,” that the injury will be “redressed by a favorable decision.”

Several older decisions involving citizen groups who had attempted to intervene in hospital chapter 9 bankruptcy proceedings informed the Barnwell court’s holding.  For instance, in In re Addison Community Hospital Authority, 175 B.R. 646 (Bankr. E.D. Mich. 1994), the court found that Community Group members “who are not creditors do not have standing to be heard under § 1109(b).” 

The Barnwell court also looked to whether the Community Group had state law standing, notwithstanding that the case turned on federal law, “since many of the issues raised by the Community Group go to the state law issues underlying the contention that Debtor is not authorized to file bankruptcy rather than to Debtor’s eligibility for bankruptcy relief.”  Quoting the South Carolina supreme court case Florence Morning News v. Bldg. Comm’n of City and County of Florence, 265 S.C. 389, 398, 218 S.E.2d 881, 884-85 (1975), the bankruptcy court noted that under state law, it is not sufficient that a taxpayer plaintiff “has merely a general interest common to all members of the public. . . .’”  The court concluded that “ a mere hypothetical injury the taxpayer shares in common with all other taxpayers is not sufficient for taxpayer standing, even under South Carolina's more lenient taxpayer standing standards.”

Based on this analysis, the Bankruptcy Court concluded that the Community Group lacked standing under Lujan and was not a party in interest.  At the heart of the Court’s conclusion was its determination that it could not be shown that the Community Group's members would experience an “actual, imminent injury if Debtor's plan is effectuated.”  At best, the court noted, “it appears that the harm the Community Group is alleging is hypothetical, contingent, and speculative. Additionally, even if it were certain that such actual injury would result, the Community Group has not shown that its members have some interest or will suffer some injury that is not common to the other residents of Barnwell County.”  This was so, the court reasoned, because “if the hospital is relocated to another county, all Barnwell County residents will suffer the same injury that the Community Group's members will suffer.”

Why the Case is Interesting:

Barnwell presents a compelling affirmation of how, particularly in cases that draw public scrutiny, courts will exercise vigilance in ensuring that for a party to have its day in bankruptcy court, it must be a party in interest under section 1109 of the Bankruptcy Code—and that means, at a minimum, that if it is not specifically listed in that statute, it passes the Lujan test of having suffered an (a) a “injury in fact” that is (b) causally connected to the matter before the court and that is (c) “likely” to be redressed by a favorable decision” by the court.  Moreover, a plaintiff’s interest in the case must not only be direct, but also one that is not shared by the general public. 

Notably, Barnwell is not the only recent case to address standing in the context of an activist group seeking to block a bankrupt hospital’s closure.  In Saint Vincents Catholic Medical Centers of New York, 429 B.R. 139 (Bankr. S.D.N.Y. 2010), Bankruptcy Judge Cecelia Morris found that a community group lacked standing to object to a motion of the debtors (represented by Kramer Levin) to approve the closure of the debtors’ hospital.  Although the absence of standing was not dispositive to the court’s ruling – it approved the debtors’ closure of the hospital in all respects – on appeal, Judge Jed Rakoff of the Southern District of New York dismissed the community group’s appeal both because it lacked standing (appellants were “unable to assert an interest undifferentiated from that of the general public”) and because, with the hospital closure process nearly complete, the appeal itself had become moot.  2010 WL 4456975 (S.D.N.Y. October 26, 2010 (No. 10 CIV. 4531 JSR).