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The Essential Resource for Today’s Busy Insolvency Professional

Intensive Care II

BY NORMAN N. KINEL AND TERENCE D. WATSON

Is There Recourse Against PCOs for Acts Committed in the Performance of Statutory Duties?

W

ith the ever-increasing number of “health care businesses”1 fjling for bankruptcy, bankruptcy professionals and judges have become increasingly aware of the numerous unan- swered questions surrounding the role of patient care ombudsmen (PCOs). This article will explore the protections that are potentially available to PCOs in connection with the exercise of their statu- tory duties, potential remedies for those who may have been harmed by the actions of a PCO, and sug- gestions for statutory changes to provide additional remedies in such situations.

Background

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made significant changes to the Bankruptcy Code for health care-related bankruptcies, including through the addition of 11 U.S.C. § 333. Section 333 cre- ated the position of “patient care ombudsman” and requires courts in the chapter 7, 9 or 11 bankruptcy proceedings of “health care businesses” to order the appointment of a PCO “unless the court fjnds that the appointment of such [an] ombudsman is not necessary for the protection of patients under the specifjc facts of the case.”2 A PCO is appointed by the U.S. Trustee and is required to perform the fol- lowing duties: (1) monitor the quality of patient care provided to patients of the debtor to the extent [that is] necessary under the cir- cumstances, including interviewing patients and physicians; (2) not later than 60 days after the date of appointment, and not less frequently than at 60-day intervals thereafter, report to the court after notice to the parties in interest, at a hearing or in writing, regarding the qual- ity of patient care provided to patients of the debtor; and (3) if such ombudsman determines that the quality of patient care provided to patients

• f the debtor is declining signifjcantly or is
• therwise being materially compromised,

fjle with the court a motion or written report, with notice to the parties in interest immedi- ately upon making such determination.3 Other than being triggered by the PCO’s belief that patient care is “declining signifjcantly or is oth- erwise being materially compromised,” § 333 (a) (3) does not limit the type of motion that a PCO is authorized to file.4 Consequently, a PCO could theoretically seek wide-ranging and case-altering relief based on the belief that health care that was provided by the debtor has been compromised. Any such motion would likely contain signifjcant factual allegations of neglect, negligence or even miscon- duct by the debtor.5 Reports fjled by a PCO may also contain similar allegations. Consequently, the mere fjling of any such motion or report could potentially impact a debtor’s continued operations and reorga-

Terence D. Watson Lowenstein฀Sandler฀LLP New฀York

1 “Health care business” is defined under the Bankruptcy Code as “any public or private entity (without regard to whether that entity is organized for-profit or not-for-profit) that is primarily engaged in offering to the general public facilities and services for — (i) diag- nosis or treatment of injury, deformity, or disease; and (ii) surgical, drug treatment, psychiatric, or obstetric care.” 11 U.S.C. § 101 (27A). 2 11 U.S.C. § 333(a)(1).

Norman฀Kinel฀ is฀a฀partner฀and฀ Terence฀Watson฀ is฀counsel฀with฀ Lowenstein฀Sandler฀ LLP’s฀Bankruptcy฀ and฀Creditors’฀ Rights฀Department฀ in฀New฀York.

3 11 U.S.C. § 333(b). 4 Despite the absence of express authority, many PCOs have filed motions seeking authorization to retain counsel, although controversy continues to exist on this issue. See,฀e.g.,฀In฀re฀Renaissance฀Hosp., 2008 WL 5746904 (Bankr. N.D. Tex. Dec. 31, 2008); In฀re฀Synergy฀Hematology-Oncology฀Medical฀Associates฀Inc., 433 B.R. 316 (Bankr. C.D. Cal. 2010). 5 The authors have not located any reported decisions in which a PCO filed a motion seeking relief other than authorization to retain counsel or to obtain access to otherwise confidential patient information.

Norman N. Kinel Lowenstein฀Sandler฀LLP New฀York

66฀Canal฀Center฀Plaza,฀Suite฀600฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abi.org nization efforts, regardless of the validity of the allegations, the ultimate success of any such motion or any subsequent rebuttal by the debtor of the PCO’s allegations.6 For example, lenders may declare an event of default under debtor-in-pos- session fjnancing agreements, asset-bidders may lose interest

• r reduce the amount of their bids, and investigations into the

debtor’s operations may be initiated at a signifjcant cost to the estate.7 PCOs, like trustees and examiners, may make mistakes or act negligently in connection with the performance of their statutory duties. Nevertheless, the ability to impose personal liability upon a PCO appears to be signifjcantly limited.8 First, despite the absence of any language in the statute

• r any reported decision cloaking a PCO with “quasi-judi-

cial immunity,” because the doctrine is regularly applied to shield trustees and examiners from personal liability, it is possible that courts could extend the doctrine to cover PCOs.9 Second, although a trustee remains subject to per- sonal liability to estate benefjciaries because a trustee owes fjduciary duties to the estate, a PCO appears to act only as a “court fjduciary,” with no fjduciary duties owed to the estate or its benefjciaries. Consequently, there appears to be no express basis for a benefjciary of the estate or a debtor to assert a breach-of-fjduciary-duty claim against a PCO. The apparent absence of any fjduciary duties owed by a PCO, coupled with the possible applicability of quasi-judicial immunity, could arguably shield PCOs from any personal liability with respect to claims that are related to the perfor- mance of their statutory duties.

Quasi-Judicial Immunity

“Anglo-American common law has long recognized judi- cial immunity for acts performed by judges that relate to the ‘judicial process.’”10 Moreover, “[b] ecause the doctrine of judicial immunity rests on the need for uninhabited judicial decision-making, immunity extends to the exercise of judicial power by any judicial offjcer.”11 Thus, a trustee may be entitled to immunity for acts that are committed within the scope of authority, even if the acts were negligently performed.12 For example, in Weissman v. Hassett,13 the trustee inves- tigated an alleged fraud that was committed by the debtor and transmitted his report as directed by the court. The report contained passages that were allegedly libelous and inter- fered with the business relations of certain former offjcers of the debtor, for which they sought damages from the trustee in his individual capacity. The trustee moved to dismiss the action on the basis that he was “absolutely immune from lia- bility on any claim arising out of statements in his Report.”14 Relying on the eloquent words of Justice Learned Hand, the court held that immunity was “essential” on public policy grounds because “to submit all offjcials, the innocent as well as the guilty, to the burden of a trial and to the inevitable danger of its outcome, would dampen the ardor of all but the most resolute, or the most irresponsible, in the unfminch- ing discharge of their duties.”15 According to the Weissman court, it is better “to leave unredressed the wrongs done by dishonest offjcers than to subject those who try to do their duty to the constant dread of retaliation.”16 Numerous other courts have similarly held that trustees are immune from suits that are related to acts committed within the scope of their statutory authority.17 Examiners appointed under § 1104 (c) have similarly been held to be immune from suits for claims related to acts committed within the scope of their statutory authority. In Kovalesky v. Carpenter, the court considered whether “an Examiner appointed by a bankruptcy court to conduct an investigation of the debtor’s affairs and to report the fjnd- ings of that investigation [is] absolutely immune from claims

• f negligence based on his or her fjndings and conclusions,”

and held that if “the trustee performing such a role is immune from claims arising from such investigation and report, it follows logically that an Examiner should be as well.”18 Accordingly, it appears likely that a PCO will assert that he/ she is immune from claims arising from the performance of statutory duties, including claims that are related to negli- gently prepared reports.

Fiduciary Duty

A trustee is “a fjduciary of each creditor of the estate, including anyone who is a party to an executory contract with the bankrupt.”19 Consequently, a trustee “has a duty to treat all creditors fairly and exercise that measure of care and diligence that an ordinary prudent person under similar circumstances would exercise.”20 Therefore, a trustee might be personally liable to benefjciaries of the estate for negligent

• r deliberate acts or omissions.21

No reported decisions have been found that address the issue of whether a PCO has fjduciary duties, and if so, who the benefjciaries of any such duties would be. Based on the limited statutory duties of a PCO, however, it is likely that at best, a PCO would be characterized as a “court fjduciary” whose duties are owed only to the appointing court, and not to the bankruptcy estate or any of its benefjciaries.22 Because of the apparent absence of fiduciary duties imposed on a PCO, claims by estate benefjciaries against

6 Debtors have filed rebuttal reports in response to reports filed by PCOs. See,฀e.g.,฀In฀re฀KidsPeace฀Corp., Case Number 13-14508 (REF) (Bankr. E.D. Pa.), Docket No. 492. 7 In one case, a court appointed an examiner to investigate “the preparation of the PCO Reports, including, without limitation ... the accuracy and veracity of the information [that was] contained in the Fourth PCO Report.”฀In฀re฀Daytop฀Village฀Foundation฀Inc.,฀et฀al., Case No. 12-11436 (SCC) (S.D.N.Y.), Docket No. 571. 8 To date, no reported decision has been found that has addressed the personal liability of a PCO for the negligent performance of his/her statutory duties, including the negligent preparation of a report. 9 Although the legislative history of § 333 indicates that a recommendation was made to “explicitly provide that [an] ombudsman shall be immune from any liabilities associated with reports submitted to the court,” the text of § 333 reveals that this recommendation was rejected or otherwise ignored. See Statement of Keith J. Shapiro before the Hearing Regarding S. 1914, The Business Bankruptcy Reform Act: Preserving Quality Patient Care in Health Care Bankruptcies, Hearing Before the Subcommittee on

• Admin. Oversight and the Courts, Committee on the Judiciary, U.S. Senate, 105th Cong. (June 1, 1998).

10 Bear฀Tooth฀Mountain฀Holdings฀Ltd.฀P’ship.฀v.฀ML฀Manager฀LLC฀(In฀re฀Mortgages฀Ltd.), 2013 WL 1336830 *4 (Bankr. D. Ariz. March 28, 2013). 11 Holbert฀v.฀Cohen-Gallet, 2006 WL 47452, *6 (E.D.N.Y. Jan. 9, 2006). 12 Such immunity might be limited, however, to claims that are asserted by non-beneficiaries. See “Liability

• f Directors of Chapter 11 Debtors in Possession: ‘Don’t Look Back — Something May Be Gaining On

You,’” Spring 1994, 68 Am.฀Bankr.฀L.J.฀155, 202 (“Simply put, courts confuse the doctrine of derived judicial immunity from suit, [which] protects trustees and other court officers against liability from suit by nonbeneficiaries of the bankruptcy trust, when acting within the scope of their authority, with standards

• f care that trustees owe to beneficiaries of the estate.”).

13 47 B.R. 462 (S.D.N.Y. 1985). 14 Weissman, 47 B.R. at 465. 15 47 B.R. at 467 (citing Gregoire฀v.฀Biddle, 177 F.2d 579, 581 (2d Cir. 1949)). 16 47 B.R. at 470 (citing Gregoire, 177 F.2d at 581). 17 See,฀e.g.,฀In฀re฀Smith, 426 B.R. 435 (E.D.N.Y. 2010); Harris฀v.฀Wittman, 590 F.3d 730 (9th Cir. 2009). 18 Kovalesky฀v.฀Carpenter, 1997 WL 630144, at *3-4 (S.D.N.Y. Oct. 9, 1997). 19 In฀re฀Cochise฀College฀Park฀Inc., 703 F.2d 1339, 1357 (9th Cir. 1983); Pereira฀v.฀Foong฀(In฀re฀Ngan฀Gung฀ Restaurant), 254 B.R. 566, 570 (Bankr. S.D.N.Y. 2000). 20 Id. 21 Id. See฀also฀Gorski฀v.฀Kirschenbaum฀(In฀re฀Gorski), 766 F.2d at 723 (2d Cir. 1985); Ngan฀Gung฀ Restaurant, 254 B.R. at 570. 22 See฀In฀re฀Congaree฀Triton฀Acquisitions฀LLC, 492 B.R. 843, 853-54 (Bankr. D.S.C. 2012) (“The Examiner is a ‘court fiduciary’.... ‘An Examiner’s legal status is unlike that of any other court-appointed officer [that] comes to mind. He is first and foremost disinterested and nonadversarial. The benefits of his inves- tigative efforts flow solely to the debtor and to its creditors and shareholders, but he answers solely to the Court.’”) (internal citation omitted).

66฀Canal฀Center฀Plaza,฀Suite฀600฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abi.org a PCO for breach of fiduciary duties would likely be

• unsuccessful. Coupled with a determination that PCOs are

immune from claims that are asserted by nonestate benefj- ciaries, this would potentially completely shield PCOs from personal liability for any errors, omissions or other negli- gence in preparing a report or motion, or potentially even intentional misconduct.

Available Remedies for PCO’s Negligent Performance of Statutory Duties

Victims of PCO negligence are not wholly without

• recourse. Under § 107

(b), a court can limit access to infor- mation contained in a PCO’s report if such information is “scandalous or defamatory.”23 In addition, a PCO’s com- pensation must be approved by the court (§ 330 (a) (1)). In addition, Bankruptcy Rule 2007.2 (d) provides that a court “may terminate the appointment of a PCO if the court fjnds that the appointment is not necessary to protect patients,” which may authorize the removal of a PCO who is improperly or incompetently performing his/her statu- tory duties.

Potential Legislative Action to Address the Paucity of Available Remedies

There are undoubtedly sound public policy reasons to provide PCOs with some protection from claims that are related to the performance of statutory duties. Nevertheless, the provision of additional remedies for a PCO’s negligent

• r intentional failure to properly investigate and report on the

debtor’s provision of patient care is warranted.24 Potential legislative solutions include amending § 324, which authorizes the removal of a “trustee or examiner,” to also explicitly authorize the removal of a PCO. Congress recognized the need to enable parties in interest to seek the removal of court-appointed offjcials, and there appears to be no basis for a PCO to be immune from such relief. In addition, safeguards can be implemented to pro- tect against the publication of inaccurate and potentially devastating PCO reports. Although § 333 (b) (2) requires a PCO to issue its report “after notice to the parties in inter- est,” and Bankruptcy Rule 2015.1 (a) provides that a notice

• f at least 14 days must be provided before a report is

made to the court, there is no requirement that a debtor be permitted to review any such report before it is pub-

• lished. Consideration should be given to amending both

§ 333 (b) (2) and Bankruptcy Rule 2015.1 (a) such that a PCO is not authorized to file or publish any reports that are required under § 333 until the debtor (and perhaps any statutorily appointed committee) has had a reasonable

• pportunity to review, comment upon and respond to any

allegations contained in the report. The court could then adjudicate any disputes prior to an objectionable PCO report being publicly fjled.25 The statutory obligations of a PCO would not be compromised by providing representa- tives of the estate and its key constituencies with a preview

• f a PCO’s report if it might signifjcantly impact a debtor’s

reorganization efforts. Therefore, legislative action is nec- essary to address the gaps in remedies that are available to parties in interest that are harmed by a PCO. abi Reprinted฀with฀permission฀from฀the฀ABI฀Journal,฀Vol.฀XXXIII,฀ No.฀5,฀May฀2014. The฀American฀Bankruptcy฀Institute฀is฀a฀multi-disciplinary,฀non- partisan฀organization฀devoted฀to฀bankruptcy฀issues.฀ABI฀has฀ more฀than฀13,000฀members,฀representing฀all฀facets฀of฀the฀ insolvency฀fjeld.฀For฀more฀information,฀visit฀ABI฀World฀at฀www. abiworld.org.

23 11 U.S.C. § 107(b)(2). 24 Because PCOs are generally neither attorneys nor parties to a proceeding, the provision authorizing the imposition of sanctions “upon the attorneys, law firms or parties” for violating Bankruptcy Rule 9011 (b) would appear to be inapplicable to the contents of a PCO report or motion. 25 An order providing similar relief was entered in In฀re฀KidsPeace฀Corp., Case No. 13-14508 (REF) (Bankr. E.D. Pa.), Docket No. 920.