San Benito Health Care District v. California Nurses Association

Background

San Benito Health Care District, doing business as Hazel Hawkins Memorial Hospital, filed for bankruptcy under Chapter 9 of the Bankruptcy Code on May 23, 2023. Chapter 9 provides bankruptcy relief to municipalities in financial distress. The California Nurses Association and the National Union of Healthcare Workers objected to the petition, principally arguing that San Benito was not insolvent.

The bankruptcy court held a four-day bench trial in December 2023 and dismissed the petition. It concluded that San Benito had not met its burden of proving that it was eligible to be a Chapter 9 debtor. San Benito appealed the dismissal, challenging several aspects of the bankruptcy court’s insolvency determination. The only Chapter 9 eligibility requirement disputed on appeal was insolvency.

Legal standards

Under the Bankruptcy Code, a municipality may be insolvent if it generally is not paying debts when they become due, or if it is unable to pay debts when they become due. The relevant date for evaluating insolvency is the date the bankruptcy petition was filed. The municipality bears the burden of proving eligibility.

The district court reviewed the bankruptcy court’s legal conclusions without deference. It reviewed factual findings under the clearly erroneous standard, meaning it would not overturn them unless left with a firm conviction that a mistake had been made. It reviewed evidentiary rulings for abuse of discretion.

Pension funding obligation

San Benito argued that it was currently and prospectively insolvent because it could not, and did not, pay certain debts, including an annual pension funding obligation under its collective-bargaining agreements. Those agreements required San Benito to contribute 1.3 percent of each employee’s annual compensation each year.

San Benito offered three estimates of the obligation, ranging from $3 million to $4.05 million. The bankruptcy court found that none of the estimates represented the required 1.3 percent contribution. It also found that the record did not establish the actual contribution required by the agreements and that an actuary’s recommendation did not itself create a presently enforceable legal obligation.

The district court rejected San Benito’s arguments that the California or United States Constitution required annual pension contributions sufficient to maintain an actuarially sound pension. The court explained that the California decisions cited by San Benito recognized contractual pension rights based on the text, structure, and legislative history of particular statutes, not directly on the constitutional contract clauses. San Benito did not show that its pension plan was created under one of those statutes or a materially similar statute. The court therefore upheld the conclusion that San Benito’s actuarial estimates were not presently enforceable debts relevant to insolvency.

The court also rejected San Benito’s argument that California law imposed fiduciary obligations requiring the annual actuarially determined contributions it described. The cited decision did not establish such a duty, and San Benito’s related argument in its reply brief was treated as waived because it had not been raised in its opening brief.

Admission of expert testimony

San Benito challenged the bankruptcy court’s admission of testimony from the Objectors’ expert, Melvin Hurley. San Benito argued that Hurley was not qualified to testify about whether financial documents were reliable for a Chapter 9 insolvency analysis and that his opinions relied on insufficient information.

The district court found no abuse of discretion. The bankruptcy court had credited testimony from San Benito’s officers that its internal financial statements accurately represented the money available to pay bills. Hurley relied on those statements, explained why he considered the information reliable, and identified problems with San Benito’s expert forecasts. The district court concluded that disagreements about data Hurley did not consider affected the weight of his testimony, rather than its admissibility.

Prospective insolvency

San Benito argued that the bankruptcy court applied an improperly strict standard to its analysis of whether San Benito would be unable to pay its debts. The district court disagreed. It held that the party bearing the burden of proving insolvency must provide reliable evidence, and that requirement follows from the requirement to prove the claim by a preponderance of the evidence.

The bankruptcy court had compared San Benito’s accrual-based internal financial statements with cash-based expert forecasts. It credited testimony that the internal statements accurately represented the cash available to pay bills and found that the forecasts consistently showed much lower ending cash balances. Based on that evidence, the bankruptcy court concluded that the forecasts were not reliable indicators of San Benito’s month-to-month cash balances and did not provide a sound basis for analyzing cash flow.

The district court held that San Benito’s remaining arguments largely asked the court to reweigh the evidence. Because the bankruptcy court’s view of the record was reasonable, the district court found no clear error.

Disposition

The district court affirmed the dismissal of San Benito’s Chapter 9 bankruptcy petition. Each side was ordered to bear its own attorney’s fees and costs.