Alabama Law Opens Path to Jackson Hospital’s Dual Bankruptcy

A newly enacted state law paves the way for the medical board that leases property to Jackson Hospital & Clinic in Alabama to seek municipal bankruptcy.

Jackson Hospital, one of state’s largest health-care institutions, filed for Chapter 11 in February. But the surrounding real estate is mostly owned by the Jackson Medical Board, a quasi-governmental entity under state law.

A potential dual structure—Chapter 11 for the hospital and Chapter 9, which governs municipal bankruptcies, for the board—is uncommon, bankruptcy scholars said. Unlike corporate cases, where a parent and its affiliates can file together, Jackson Hospital’s situation raises new logistical challenges for lawyers balancing different chapters of bankruptcy law.

“It raises interesting questions about how this would actually be effectuated because you have two separate debtors in two separate cases,” said Gary Sullivan, a law professor at the University of Alabama who teaches courses focused on the bankruptcy code. “How they would sort of package the hospital and the real property together in the sales process is unclear.”

Jackson Hospital’s bankruptcy reflects broader financial strain in the health-care sector, driven by rising labor costs, stagnant reimbursement rates, and the Covid-19 pandemic. Other systems that filed for bankruptcy in the past year include Prospect Medical Holdings, Steward Health Care System LLC, and CarePoint Health Systems.

The Alabama law, signed by Gov. Kay Ivey (R) this month, allows medical boards to file for bankruptcy if they lease property to a licensed acute care hospital or health-care provider in a voluntary Chapter 11. It also grants board members immunity from personal and official liability claims.

“This is a different animal, so I assume there’s going to be some coordination,” said Laura Coordes, a law professor at Arizona State University who researches bankruptcy and financial distress. “This is sort of a new ground.”

While the law doesn’t name the Jackson Medical Board, lawmakers said during legislative sessions that they intended to help the bankrupt health-care facility. State Sen. Kirk Hatcher (D), who introduced the measure, didn’t provide a comment.

Neither Jackson Hospital nor its attorneys responded to a list of questions. The hospital in a February statement said the bankruptcy provides “time and breathing room” to explore strategic alternatives, resolve legacy debt, settle claims, and secure its future.

Meeting Eligibility Criteria

Sullivan said most disputes between creditors and debtors in Chapter 9 cases center on a debtor’s eligibility to file in the first place.

The new law satisfies the bankruptcy code’s requirement for state authorization, but the board may still face challenges as it must prove it’s insolvent.

It also needs to show it has negotiated with creditors in a good faith attempt to reach an agreement.

“This is where I would expect the fights to be between the bondholders and the medical board,” Sullivan said.

The medical board, however, could use the hospital’s existing Chapter 11 bankruptcy to pass the insolvency test.

“The structure is that the hospital is the tenant of Jackson Medical Board, and because the medical board’s tenant is in bankruptcy and a state of financial distress, it’s likely that the medical board would be able to show that they are insolvent,” Sullivan said.

Creditors have “less leverage” in Chapter 9 than in Chapter 11 because, among other elements, there’s no threat of liquidating government assets, Sullivan noted.

Still, he said, the filing is necessary for Jackson Hospital. Without the medical board’s real estate, there would be no potential buyers.

“The legislation could be very helpful, I suppose, if the board is able to file and then deal with those valuable assets in a bankruptcy proceeding,” Coordes said. “That could be helpful, in turn, to the hospital, making the hospital functional and able to continue to provide services.”

In an April 18 motion seeking approval to sell nearly all of its assets, the hospital said it owns “some ancillary parcels of property,” as well as certain intellectual property, accounts receivable, inventory, equipment, and equity interests in entities tied to the health-care facility’s operations. Jackson Hospital said those entities could also be sold.

The hospital added that its counsel contacted more than 190 potential buyers, and 11 have signed nondisclosure agreements.

Immunity Clauses

The Alabama House of Representatives added language to the legislation that grants board members immunity from personal and official liability claims, such as for negligence or breach of fiduciary duty.

The protection shields board officers involved in bankruptcy from liability if something goes wrong or services are disrupted during the case.

Richard S. Saver, a law professor at the University of North Carolina specializing in health policy, said immunity clauses for board members are standard in other contexts. For instance, a few states provide immunity for board members of nonprofit corporations by statute.

“The Alabama language follows a similar approach in providing immunity for the board members’ general negligence but not for intentional or willful misconduct,” Saver said. “It does not strike me as nonstandard, at least as for how these clauses appear in other contexts.”

Sullivan said the law mirrors the language of directors and officers insurance, which can cover officials in adversary proceedings and other litigation.

“When you’re dealing with a large acute care hospital,” he said, “you have many patients that are in intensive care,” and who could potentially be looking to sue.