For a nonprofit hospital in bankruptcy, the decision to sell substantially all of its assets is rarely straightforward. The harder question is often—What comes next? When competing bids arrive and one offers more money while another promises to better serve the mission, how does the board select an offer?
Courts have addressed that question directly, and the answer is more nuanced than the Bankruptcy Code’s general preference for value maximization might suggest.
What is a Section 363 sale, and what does it mean for nonprofit healthcare organizations?
Sales of substantially all assets in bankruptcy are governed by Section 363 of the Bankruptcy Code, a federal provision that allows an organization to sell its major assets before a full reorganization plan is confirmed. The sale requires court approval and a competitive bidding process. A key feature is that assets can transfer free and clear of most liens and claims, which makes these transactions attractive to buyers and efficient for creditors. The goal, in most for-profit cases, is to simply maximize recovery for the organization’s creditors.
In a nonprofit healthcare context, however, courts have recognized that value is not measured in financial terms alone. Two cases illustrate how courts have handled this tension.
In In re United Healthcare System, Inc., a bankruptcy proceeding in the District of New Jersey, the bankruptcy court initially ruled against a nonprofit board that had selected a lower bid because it better advanced the organization’s charitable purpose. The district court reversed that decision. Bankruptcy courts, it held, are not required to mechanically apply the Code to produce the highest dollar figure, and the board had appropriately weighed public health concerns in evaluating the competing offers.
A Bankruptcy Court for the Southern District of New York applied a similar approach in In re HHH Choices Health Plan, LLC. There, the court evaluated each bid against multiple criteria: the financial consequences of closing, the feasibility of continuing operations under each proposed buyer, the likelihood of regulatory approval, and the degree to which each bid aligned with the organization’s mission. Applying those criteria, the court approved a lower bid that better served the charitable purpose.
Taken together, these decisions establish that a nonprofit healthcare board may not be required to sell to the highest bidder, provided the board can demonstrate that its decision was the product of a rigorous, well-documented process.
Likewise, buyers seeking to obtain the assets of a nonprofit should consider these factors when formulating their bid and the price they are willing to offer.
The creditor side of the equation
The flexibility courts have extended to nonproit healthcare boards in asset sales does not mean creditor interests are secondary. They are not. Courts have been clear that a nonprofit’s mission cannot be sustained at creditors’ expense without their consent. The closer an organization is to insolvency, and the more its creditors stand to recover from a higher-priced sale, the more difficult it becomes to justify selecting a lower bid on mission grounds alone.
This requires the board to be candid about where the organization stands financially and what the creditor implications of each option are. A board that treats every decision as mission focused, without seriously engaging with creditor recovery, will not receive the same judicial deference as one that weighed both.
Steps nonprofit healthcare boards should take before a sale
- Establish bid evaluation criteria before bids are submitted. Courts look more favorably on criteria developed in advance and applied consistently than on criteria that appear to have been shaped around a preferred bidder.
- Engage advisors with healthcare transaction experience. While mission-conscious bid selections are legally defensible, they require a record that reflects financial analysis alongside values.
- Make sure the board is the decision-maker. In a Section 363 sale, courts evaluate the board’s judgment. Management can bring recommendations, but board deliberations, documented in minutes that reflect genuine engagement with the competing bids, are the evidentiary record that matters.
- Factor regulatory approval into the analysis from the start. In nonprofit healthcare transactions, regulatory approval can be as determinative as price. Further, the Bankruptcy Code does not eliminate the need for a buyer to obtain necessary state and federal regulatory approvals. A higher bid from a buyer unlikely to obtain state or federal approval has limited practical value. Building regulatory risk into the bid evaluation framework early is both legally sound and practically important.
Nixon Peabody Healthcare Restructuring attorneys have advised nonprofit organizations through healthcare bankruptcy proceedings and Section 363 asset sales such as St. Francis Hospital, LRG Healthcare, Westerly Hospital, St. Vincent Medical Center, Our Lady of Mercy Medical Center, Sound Shore Hospital Systems, Cabrini Medical Center, and Long Beach Hospital and Nursing Home, among others. If your organization is facing a potential sale or restructuring or is seeking to acquire a distressed healthcare organization, contact your Nixon Peabody attorney to learn how we may be able to assist in your situation.