California Attorney General Xavier Becerra wants to block the sale of O’Connor and Saint Louise hospitals to Santa Clara County, putting him on a legal collision course with a U.S. bankruptcy judge and the county.
If the attorney general is successful, says Santa Clara County Executive Jeff Smith, the deal for the county’s $235 million purchase of the two local hospitals from Verity Health System is dead and the hospitals will close, with no prospect of reopening under new owners.
There was no indication in recent court filings that Becerra realized that his actions could put more than 2,000 hospital workers out of work and leave South County communities miles away from hospital services.
“The attorney general’s actions to block the sale of Verity’s hospitals to the county is a real threat to the health of our community, our residents and the vulnerable populations the hospitals serve,” Smith said in a statement Jan.10.
Earlier in the day, Thursday, Jan. 10, the U.S. Bankruptcy Court in Los Angeles had set a hearing date for Becerra’s request for a Jan. 30 hearing of his bid to stop the hospitals’ sale.
Becerra declined to answer questions sent in emails to his office on Jan. 11.
Smith said in an interview that he was attempting to reach out to the attorney general, in hopes of resolving the dispute and enabling the hospitals’ sale.
Becerra contends in court documents that any sale of hospitals owned by Verity Health must adhere to strict conditions set down in December 2015 by his predecessor Kamala Harris, regardless of the consequences.
“It’s absurd,” said a frustrated Smith in an interview Jan. 11. His exhilaration over the pending success of a plan to save two failing hospitals and expand health care for thousands of county residents is now clouded by a new threat from the state’s highest law enforcement official.
Smith cites unions’ influence
Smith said the attorney general doesn’t understand California law and has succumbed to pressure from politically powerful labor unions.
If the purchase agreement with Verity Health fails because of delays caused by Becerra’s effort, and the hospitals close, “It would be a disaster,” said the county executive who holds both medical and legal degrees.
Blocking the county purchase would mean “the hospitals will close—and nobody is going to buy them. They will be sold to some developer, torn down and turned into condos,” Smith said.
Things had looked brighter on Christmas Eve, when bankruptcy Judge Ernest Robles ruled that “the attorney general’s objections to the sale motion are overruled, and the debtors are authorized to sell the hospitals free and clear of the conditions.”
Less than a week later, four unions representing nurses and other health care workers joined Becerra in seeking the Jan. 30 hearing in Los Angeles to appeal the late-December order.
Becerra supported the unions’ claim that the new owner of the hospital, Santa Clara County, was required to honor all of the 2015 conditions, which included the unions’ labor contracts with Verity and the retention of Verity-funded employee pensions.
Employees lose pensions
Under the sale agreement reached in early December between Verity Health and Santa Clara County, all employees of Saint Louise Regional Hospital in Gilroy and O’Connor Hospital in San Jose would be re-hired by the county under existing public employee contracts, but they would lose their seniority. They also would lose their Verity pensions, whose funds would be swallowed up by the banks and lenders who are Verity Health’s major creditors, as part of the Chapter 11 reorganization.
Smith said that some of the approximately 2,000 employees at the two hospitals have already quit because of the uncertain future.
“We have been having employment fairs, inviting the employes to apply,” he said. “We expected to give them an informal employment offer on Feb. 9.”
He said more than 1,200 current hospital employees had applied to keep their jobs as of Jan. 11.
Last year ended with a flurry of more than 200 documents filed in connection with the sale of two of Verity Health’s six hospitals to Santa Clara County. There are no other pending sale offers for Verity’s other hospitals, two in San Mateo County and two in Los Angeles, and their fate is uncertain.
Some of the documents were from creditors, including UMB Bank, US Bank, MOB Financing, even Kaiser Foundation hospitals.
Others were from the unions—Service Employees International Union-United Healthcare Workers-West, Licensed Vocational Nurses Association, California Nurses Association and Engineers and Scientists of California, IFPTE Local 20—as well as the main physicians’ group, California Physicians’ Service dba Blue Shield of California, and heath insurer Health Net of California.
Becerra had first objected in October to the county plan to purchase the O’Connor and Saint Louise “free and clear of the  conditions,” and to bidding procedures for the pending bankruptcy auction.
County seeking resolution
Santa Clara County said in response in a filing in November that “its status as a government entity made it impossible to comply with certain conditions without violating its obligations under California law and the California Constitution.”
“We’ve been trying to communicate with the attorney general’s office extensively since Dec. 19,” said Smith. The attorney general filed a statement on Dec. 14 that he would not object to the sale. Five days later he appeared to have changed his mind and on Dec. 21 filed objections to the sale, returning to this contention that it violated the 2015 conditions placed on any potential buyers of the Verity hospitals.
Becerra “is asking us to assume responsibilities we can’t legally assume,” said Smith.
He said the 53 conditions established three years ago by Harris and the involvement of the attorney general’s office should not apply to the county purchase of the hospitals because the county is not a private corporation.
“I would argue that state law is pretty clear, that the attorney general has no authority over the purchase of a non-profit by a government entity. It does have authority to over deals between private entities. The attorney general would have authority to impose conditions on a private entity.”
Bankruptcy Judge Robles agreed, in a decision filed two days after Christmas.
“The attorney general’s Charitable Trust Division doesn’t understand we are government; in fact, the county is legally a subdivision of the state,” said the county executive.
The labor contracts that the unions and Becerra want the county to honor cannot under California law be transferred from private, albeit non-profit, entities to a public entity, said Smith.
The county executive said he understood that the attorney general’s office also is concerned about the precedent that the Santa Clara County case could have on two other Verity properties, Sequoia Hospital in San Mateo or St. Francis Hospital in Los Angeles.
“The Charitable Trust Division is troubled that the sale order essentially sets a precedent that the attorney general doesn’t like—that the bankruptcy can discharge all of the conditions in the bankruptcy court for any future sales to other private entities,” he said. “They are unnecessarily concerned about the precedent.”
On Dec. 27, the U.S. Bankruptcy Court in Los Angeles approved the county’s bid to acquire O’Connor Hospital in San Jose, St. Louise Regional Hospital in Gilroy and DePaul Health Center in Morgan Hill for $235 million. The county would be adding the two hospitals to its health system which already includes Santa Clara Valley Medical Center in San Jose.
Quality, compassion promised
The three hospitals, their staff and physicians, would all share the county’s mission to provide “high quality, compassionate, and accessible healthcare,” according to Smith. “As a public hospital system, the county provides care to all people living in Santa Clara County, and this acquisition would support the county’s ability to serve even more residents in the community.”
He said the county has made arrangements to transfer Medicare and Medi-Cal responsibilities from O’Connor and Saint Louise to Santa Clara County.
“County leadership is already working on transition planning with the leaders, managers, and employees in these hospitals in preparation for an expected late-February ownership change, and to make the transition as seamless as possible,” Smith said. “Adding these hospitals to our health system would ensure the continued availability of essential healthcare services that their communities have depended on for more than a century.”
“Because of this attempt to block the sale, our efforts and the viability of these community hospitals are now in jeopardy.” Smth said in a statement.
On Oct.10, the attorney general filed an objection to the bidding procedures. He also objected to the debtors’ proposal to sell the hospitals free and clear of the conditions, contending that the conditions remained binding upon any purchaser of the hospitals.
Santa Clara reminded the judge in response that if an order providing for a sale “ free and clear of the conditions” was not entered by the Jan. 2, 2019 deadline set in the original purchase agreement, “it would be Santa Clara’s position that a breach of the [agreement] had occurred.”
The bankruptcy judge’s Dec. 27 ruling declared that the attorney general’s response “was so inconsistent with an intent to continue to enforce the conditions against Santa Clara as to induce Santa Clara to reasonably believe that the attorney general had abandoned his position as to the enforceability of the conditions.”
This link provides access to the documents filed in the federal bankruptcy action http://www.kccllc.net/verityhealth/document/list/4736