An attorney for the Erlanger Health System said Erlanger is willing to forego foreclosure against Hutcheson Medical Center and go along with a sale of the troubled Fort Oglethorpe Hospital for "a reasonable portion" of the sale receipts.
Attorney Edward Marshall of Atlanta said that scenario would reduce the exposure of Walker and Catoosa counties, who guaranteed $10 million each of the $20 million that Erlanger put into the hospital while managing it.
That amount remains unpaid to Erlanger, which filed suit against Hutcheson. In turn, Hutcheson filed for bankruptcy and counter-sued Erlanger, saying its management made the fiscal situation worse.
Attorney Marshall also said it may be difficult to find a viable buyer for Hutcheson because "multiple provisions in the lease make it clear that any transfer must be to a 501(c)(3) entity in order to preserve the tax-exempt status of the underlying bonds.
"Alternatively, the debtor would need to get a bond counsel opinion that any transfer to a non-501(c0(3) entity would not threaten the tax-exempt status of the bonds.
"In our opinion, these provisions need to be considered in assessing whether, in light of all of the prevailing circumstances, there may be or are likely to be viable bidders.'
Attorney Marshall gave Erlanger's position on its right to foreclosure, then he wrote, "All that having been said, Erlanger would be open to a reasonable proposal to avoid foreclosure (or even to facilitate a transfer to an interested purchaser on a non-judicial foreclosure conducted by Erlanger).
"That could take the form of, inter alia, Erlanger's receipt of a reasonable portion of any court-approved sale proceeds, which could then - with the consent of Walker and Catoosa counties - reduce the counties' guaranty exposure and (with the counties' consent) satisfy the foreclosure prerequisite to the counties' guarantees.
"Ultimately, however, that may require agreement from the counties and their leaders, who represent the constituencies most impacted by any completed foreclosure action, but who have been noticeably absent from these proceedings. It would also require Erlanger's analysis of the specific terms of any proposed transactions."
Bankruptcy Judge Paul Bonapfel of Atlanta had asked the attorneys to brief him on the complicated foreclosure issue. It is complicated by the fact that the land where the hospital sits is owned by the Hospital Authority of Catoosa, Walker and Dade counties. The hospital operates under a 40-year lease with 20 years remaining on it.
With debt continuing to accumulate, hospital officials are seeking a buyer. Officials said one purchaser may be willing to pay over $20 million for all the hospital assets.
Attorney Marshall said the two counties had agreed to guarantee the $20 million, but had insisted that Erlanger first had to foreclose on property belonging to the Hospital Authority.
He said the counties' guarantees are capped at a total of $20 million. He said, with interest and late fees, the amount owed Erlanger is now above $30 million. He said, due to the $20 million cap, "The passage of time is causing Erlanger continued harm in the form of interest and late fees that it will likely be unable to collect from any source."
Attorney Marshall said, "Erlanger is seeking to foreclose only because the counties - the bodies that represent the affected constituencies and, presumably, should be most interested in having a viable community hospital - have refused to waive the provision in the deed to secure debt that makes non-judicial foreclosure, a pre-requisite to seeking payment from the two counties."